Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]
(Mark One)
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2013

OR

[    ]For the quarterly period ended July 31, 2013
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             

For the transition period fromto

Commission file number 1-6089

LOGO

H&R Block, Inc.

(Exact name of registrant as specified in its charter)

MISSOURI 44-0607856

(State or other jurisdiction of

(I.R.S. Employer
incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One H&R Block Way,

Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)

(816) 854-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesÖþNo

¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YesÖþNo

¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerÖ  Accelerated filerNon-accelerated filerSmaller reporting company
(Do not check if a smaller reporting company)

Large accelerated filer þ          Accelerated filer ¨         Non-accelerated filer ¨         Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ NoÖþ

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on February 28,August 31, 2013 was 272,319,178: 273,863,581 shares.


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Table of Contents

Form 10-Q for the Period Ended JanuaryJuly 31, 2013


Table of Contents


Page

PART I

Financial Information

Item 1.

PART I
 

Item 1.
Consolidated Balance Sheets
As of JanuaryJuly 31, 2013, July 31, 2012 and April 30, 20122013
1

  1
 

Consolidated Statements of Operations and
Comprehensive Income (Loss)
Loss

Three and nine months ended JanuaryJuly 31, 2013 and 2012
2

  2
 

Condensed Consolidated Statements of Cash Flows
Nine

Three months ended JanuaryJuly 31, 2013 and 2012
3

  3
 

Notes to Consolidated Financial Statements

4

  4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34
  34

Item 3.

Quantitative and Qualitative Disclosures aboutAbout Market Risk

43
  
44
Item 4.
Controls and Procedures
43
 
PART II

Item 4.

1.
Legal Proceedings

Controls and Procedures43

  
45
Item 1A.
Risk Factors
43
 

PART II

Other Information

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

  
47Item 3.Defaults Upon Senior Securities
44
 
Item 4.Mine Safety Disclosures
44
Item 5.
Other Information
44
Item 6.
Exhibits
45
Signatures
46

Table of Contents

PART I    FINANCIAL INFORMATION

Item 5.

ITEM 1.

Other Information

47FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 
(in 000s, except share and 
per share amounts)
 
As of July 31, 2013
 July 31, 2012
 April 30, 2013
  (unaudited)
 (unaudited)
  
ASSETS      
Cash and cash equivalents $1,163,876
 $939,871
 $1,747,584
Cash and cash equivalents — restricted 55,477
 43,109
 117,837
Receivables, less allowance for doubtful accounts of $52,606, $43,477 and $50,399 121,309
 116,357
 206,835
Prepaid expenses and other current assets 356,662
 318,262
 390,087
Mortgage loans held for sale 7,608
 —
 —
Total current assets 1,704,932
 1,417,599
 2,462,343
Mortgage loans held for investment, less allowance for loan losses of $15,514, $22,185 and $14,314 309,681
 386,759
 338,789
Investments in available-for-sale securities 487,033
 380,765
 486,876
Property and equipment, at cost less accumulated depreciation and amortization of $432,681, $542,144 and $420,318 286,584
 242,585
 267,880
Intangible assets, net 280,455
 271,533
 284,439
Goodwill 435,667
 431,101
 434,782
Other assets 258,536
 463,935
 262,670
Total assets $3,762,888
 $3,594,277
 $4,537,779
LIABILITIES AND STOCKHOLDERS’ EQUITY      
LIABILITIES:      
Customer banking deposits $757,929
 $648,378
 $936,464
Accounts payable, accrued expenses and other current liabilities 443,065
 414,604
 523,921
Accrued salaries, wages and payroll taxes 32,926
 35,234
 134,970
Accrued income taxes 215,834
 278,539
 416,128
Current portion of long-term debt 730
 600,642
 722
Total current liabilities 1,450,484
 1,977,397
 2,012,205
Long-term debt 905,902
 408,992
 905,958
Other noncurrent liabilities 301,187
 362,215
 356,069
Total liabilities 2,657,573
 2,748,604
 3,274,232
COMMITMENTS AND CONTINGENCIES 

 

 

STOCKHOLDERS’ EQUITY:      
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 316,628,110 3,166
 3,166
 3,166
Convertible preferred stock, no par, stated value $0.01 per share, 500,000 shares authorized —
 —
 —
Additional paid-in capital 753,209
 744,616
 752,483
Accumulated other comprehensive income (loss) (257) 7,350
 10,550
Retained earnings 1,163,651
 955,873
 1,333,445
Less treasury shares, at cost (814,454) (865,332) (836,097)
Total stockholders’ equity 1,105,315
 845,673
 1,263,547
Total liabilities and stockholders’ equity $3,762,888
 $3,594,277
 $4,537,779
       
See accompanying notes to consolidated financial statements.

Item 6.

Exhibits

48

SIGNATURES

H&R Block Q1 FY2014 Form 10-Q		491

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CONSOLIDATED BALANCE SHEETS  (amounts in 000s, except share and per share amounts) 
As of  January 31, 2013  April 30, 2012 
   (Unaudited)    

ASSETS

   

Cash and cash equivalents

   $     418,385    $1,944,334  

Cash and cash equivalents – restricted

   37,958    48,100  

Receivables, less allowance for doubtful accounts
of $44,829 and $44,589

   949,160    193,858  

Prepaid expenses and other current assets

   331,046    314,702  
  

 

 

  

 

 

 

Total current assets

   1,736,549    2,500,994  
   

Mortgage loans held for investment, less allowance for
loan losses of $17,256 and $26,540

   357,887    406,201  

Investments in available-for-sale securities

   396,312    371,315  

Property and equipment, at cost, less accumulated depreciation and amortization of $581,246 and $622,313

   290,165    252,985  

Intangible assets, net

   271,523    264,451  

Goodwill

   435,256    427,566  

Other assets

   444,804    426,055  
  

 

 

  

 

 

 

Total assets

   $3,932,496    $4,649,567  
  

 

 

  

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Liabilities:

   

Commercial paper borrowings

   $     424,967    $              –  

Customer banking deposits

   1,036,968    827,549  

Accounts payable, accrued expenses and other current liabilities

   479,660    567,079  

Accrued salaries, wages and payroll taxes

   103,538    163,992  

Accrued income taxes

   17,348    336,374  

Current portion of long-term debt

   713    631,434  
  

 

 

  

 

 

 

Total current liabilities

   2,063,194    2,526,428  

Long-term debt

   906,012    409,115  

Other noncurrent liabilities

   328,402    388,132  
  

 

 

  

 

 

 

Total liabilities

   3,297,608    3,323,675  
  

 

 

  

 

 

 

Commitments and contingencies

   

Stockholders’ equity:

   

Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 316,628,110 and 397,886,599

   3,166    3,979  

Additional paid-in capital

   747,398    796,784  

Accumulated other comprehensive income

   9,055    12,145  

Retained earnings

   723,676    2,523,997  

Less treasury shares, at cost

   (848,407)   (2,011,013) 
  

 

 

  

 

 

 

Total stockholders’ equity

   634,888    1,325,892  
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

   $  3,932,496    $4,649,567  
  

 

 

  

 

 

 

Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
 
(unaudited, in 000s, except 
per share amounts)
 
Three months ended July 31, 2013
 2012
     
REVENUES:    
Service revenues $107,800
 $79,896
Product and other revenues 8,198
 6,720
Interest income 11,197
 9,873
  127,195
 96,489
OPERATING EXPENSES:    
Cost of revenues:    
Compensation and benefits 46,312
 39,585
Occupancy and equipment 78,736
 79,951
Provision for bad debt and loan losses 11,491
 4,645
Interest 14,446
 22,077
Depreciation and amortization of property and equipment 16,804
 14,534
Other 42,264
 32,632
  210,053
 193,424
Selling, general and administrative 96,697
 75,478
  306,750
 268,902
Operating loss (179,555) (172,413)
Other income (expense), net (4,939) 3,144
Loss from continuing operations before income tax benefit (184,494) (169,269)
Income tax benefit (71,224) (63,619)
Net loss from continuing operations (113,270) (105,650)
Net loss from discontinued operations (1,917) (1,791)
NET LOSS $(115,187) $(107,441)
     
BASIC AND DILUTED LOSS PER SHARE:    
Continuing operations $(0.42) $(0.38)
Discontinued operations —
 (0.01)
Consolidated $(0.42) $(0.39)
     
DIVIDENDS PER SHARE $0.20
 $0.20
     
COMPREHENSIVE INCOME (LOSS):    
Net loss $(115,187) $(107,441)
Unrealized gains (losses) on available-for-sale securities, net of taxes:    
Unrealized holding gains (losses) arising during the period,
net of taxes (benefit) of ($5,065) and $152		 (7,715) 170
Reclassification adjustment for gains included in income,
net of taxes		 —
 —
Change in foreign currency translation adjustments (3,092) (4,965)
Other comprehensive loss (10,807) (4,795)
Comprehensive loss $(125,994) $(112,236)
     
See Notesaccompanying notes to Consolidated Financial Statements

-1-

LOGO

CONSOLIDATED STATEMENTS OF OPERATIONS  

(Unaudited, amounts in 000s,

except per share amounts)

 

 
AND COMPREHENSIVE INCOME (LOSS)  
   
  Three months ended
January 31,		  Nine months ended
January 31,		 
   2013  2012  2013  2012 

Revenues:

    

Service revenues

 $362,194   $524,240   $558,528   $717,243  

Product and other revenues

  71,485    99,564    89,171    116,117  

Interest income

  38,300    39,476    58,032    59,737  
 

 

 

  

 

 

  

 

 

  

 

 

 
  471,979    663,280    705,731    893,097  
 

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

    

Cost of revenues:

    

Compensation and benefits

  160,081    207,480    254,430    316,139  

Occupancy and equipment

  84,710    93,024    247,059    263,078  

Depreciation/amortization of property and equipment

  20,067    17,770    54,299    50,894  

Provision for bad debt and loan losses

  43,028    52,932    51,398    68,423  

Interest

  19,428    23,543    64,895    69,352  

Other

  50,304    60,491    110,972    127,551  
 

 

 

  

 

 

  

 

 

  

 

 

 
  377,618    455,240    783,053    895,437  

Impairment of goodwill

  –    –    –    4,257  

Selling, general and administrative expenses

  186,997    211,736    352,802    408,144  
 

 

 

  

 

 

  

 

 

  

 

 

 
  564,615    666,976    1,135,855    1,307,838  
 

 

 

  

 

 

  

 

 

  

 

 

 

Operating loss

  (92,636)   (3,696)   (430,124)   (414,741) 

Other income (expense), net

  (3,632)   2,670    2,299    9,185  
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before taxes (benefit)

  (96,268)   (1,026)   (427,825)   (405,556) 

Income taxes (benefit)

  (79,353)   2,541    (204,061)   (159,821) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Net loss from continuing operations

  (16,915)   (3,567)   (223,764)   (245,735) 

Net income (loss) from discontinued operations

  (793)   218    (6,628)   (74,436) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

 $(17,708)  $(3,349)  $(230,392)  $(320,171) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Basic and diluted loss per share:

    

Net loss from continuing operations

 $(0.06)  $(0.01)  $(0.82)  $(0.82) 

Net income (loss) from discontinued operations

  (0.01)   –    (0.02)   (0.25) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

 $(0.07)  $(0.01)  $(0.84)  $(1.07) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Basic and diluted shares

  271,542    292,963    273,281    299,450  
 

 

 

  

 

 

  

 

 

  

 

 

 

Dividends paid per share

 $0.20   $0.20   $0.60   $0.50  
 

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss):

    

Net loss

 $(17,708)  $(3,349)  $(230,392)  $(320,171) 

Unrealized gains (losses) on securities, net of taxes:

    

Unrealized holding gains (losses) arising during the period, net of taxes (benefit) of $(405), $(199), $(122) and $1,113

  (605)   (291)   (248)   1,682  

Reclassification adjustment for gains included in income, net of taxes of $ –, $ –, $71 and $58

  –    –    (104)   (93) 

Change in foreign currency translation adjustments

  975    3,341    (2,738)   (5,413) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss)

  370    3,050    (3,090)   (3,824) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive loss

 $(17,338)  $(299)  $(233,482)  $(323,995) 
 

 

 

  

 

 

  

 

 

  

 

 

 
  

 

 

  

 

 

  

 

 

  

 

 

 

See Notes to Consolidated Financial Statements

-2-

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited, amounts in 000s) 
Nine months ended January 31,  2013   2012 

Net cash used in operating activities

  $(1,311,926)   $(1,382,771) 
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale securities

   (108,351)    (178,014) 

Sales, maturities and payments received on available-for-sale securities

   86,808     40,473  

Principal repayments on mortgage loans held for investment, net

   31,205     35,460  

Purchases of property and equipment, net

   (96,063)    (71,549) 

Payments made for acquisitions of businesses and intangibles, net

   (20,662)    (16,022) 

Proceeds from sales of businesses, net

   1,212     533,055  

Franchise loans:

    

Loans funded

   (68,874)    (43,649) 

Payments received

   9,594     8,455  

Other, net

   (15,185)    15,321  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

   (180,316)    323,530  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayments of commercial paper

   (789,271)    (413,221) 

Proceeds from commercial paper

   1,214,238     644,168  

Repayments of long-term debt

   (636,621)    –  

Proceeds from issuance of long-term debt

   497,185     –  

Customer banking deposits, net

   208,753     735,252  

Dividends paid

   (162,692)    (150,058) 

Repurchase of common stock, including shares surrendered

   (340,298)    (180,566) 

Proceeds from exercise of stock options, net

   11,529     (324) 

Other, net

   (36,113)    (31,424) 
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   (33,290)    603,827  
  

 

 

   

 

 

 

Effects of exchange rates on cash

   (417)    (3,446) 

Net decrease in cash and cash equivalents

   (1,525,949)    (458,860) 

Cash and cash equivalents at beginning of the period

   1,944,334     1,677,844  
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

  $418,385    $1,218,984  
  

 

 

   

 

 

 

Supplementary cash flow data:

    

Income taxes paid, net

  $104,986    $163,471  

Interest paid on borrowings

   62,160     55,266  

Interest paid on deposits

   4,377     5,170  

Transfers of foreclosed loans to other assets

   7,208     6,521  

See Notes to Consolidated Financial Statements

-3-

consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2(unaudited) H&R Block Q1 FY2014 Form 10-Q

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in 000s) 
Three months ended July 31, 2013
 2012
     
NET CASH USED IN OPERATING ACTIVITIES $(318,742) $(373,140)
     
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of available-for-sale securities (45,158) (28,990)
Maturities of and payments received on available-for-sale securities 32,061
 21,129
Principal payments on mortgage loans held for investment, net 11,707
 12,652
Purchases of property and equipment (34,386) (13,273)
Franchise loans:    
Loans funded (6,657) (5,062)
Payments received 7,164
 5,154
Other, net 6,179
 1,675
Net cash used in investing activities (29,090) (6,715)
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
Repayments of long-term debt —
 (30,831)
Customer banking deposits, net (179,364) (179,519)
Dividends paid (54,550) (54,201)
Repurchase of common stock, including shares surrendered (4,201) (339,088)
Proceeds from exercise of stock options 21,953
 468
Other, net (13,093) (19,939)
Net cash used in financing activities (229,255) (623,110)
     
Effects of exchange rates on cash (6,621) (1,498)
     
Net decrease in cash and cash equivalents (583,708) (1,004,463)
Cash and cash equivalents at beginning of the period 1,747,584
 1,944,334
Cash and cash equivalents at end of the period $1,163,876
 $939,871
     
SUPPLEMENTARY CASH FLOW DATA:    
Income taxes paid, net of refunds received $106,467
 $19,747
Interest paid on borrowings 15,883
 13,494
Interest paid on deposits 640
 1,336
Transfers of foreclosed loans to other assets 2,100
 3,074
Accrued additions to property and equipment 8,048
 7,107
Transfer of mortgage loans held for investment to held for sale 7,608
 —
     
See accompanying notes to consolidated financial statements.



1.
Summary of Significant Accounting Policies
H&R Block Q1 FY2014 Form 10-Q3

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -

The consolidated balance sheetsheets as of JanuaryJuly 31, 2013 and 2012, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended JanuaryJuly 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the ninethree months ended JanuaryJuly 31, 2013 and 2012 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at JanuaryJuly 31, 2013 and 2012 and for all periods presented have been made. See note 14 for discussion of our presentation of discontinued operations.

“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 20122013 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 20122013 or for the year then ended, are derived from our April 30, 20122013 Annual Report to Shareholders on Form 10-K.

Management Estimates -

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the determination of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, allowance for loan losses, fair value of reporting units, valuation allowances based on future taxable income, reserves for uncertain tax positions and related matters. Estimates have been prepared on the basis of the most current and best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.

Seasonality of Business -

Our operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.

Recently Issued or Newly Adopted Accounting Standards - In February 2013, the Financial Accounting Standards Board issued guidance which expands disclosure requirements for other comprehensive income. The guidance requires the reporting of the effect of the reclassification of items out of accumulated other comprehensive income on each affected net income line item. The guidance is effective for interim and annual periods beginning on or after December 15, 2012 and is to be applied prospectively. This guidance, which we adopted as of May 1, 2013, did not have a material impact on our financial statements, as we had no reclassifications of items out of accumulated other comprehensive income for the first quarter of fiscal 2014.
NOTE 2: H&R BLOCK BANK
On July 11, 2013, H&R Block Bank (HRB Bank) and Block Financial LLC (Block Financial) entered into a definitive Purchase and Assumption Agreement (P&A Agreement) with Republic Bank & Trust Company (Republic Bank). Pursuant to the P&A Agreement, HRB Bank will, among other matters, transfer all of its deposit liabilities, ($759.7 million if the closing were effective July 31, 2013) to Republic Bank with a cash payment of approximately the same amount, subject to several conditions, including the finalization of various operating agreements and regulatory approval (P&A Transaction). If the respective parties receive regulatory approval on or before September 30, 2013, this transaction will have a closing date of not later than November 15, 2013. If regulatory approval is received after September 30, 2013 but on or before March 31, 2014, this transaction will have a closing date between April 30, 2014 and June 18, 2014. Simultaneously with any closing, HRB Bank will convert into a national banking association, merge with and into Block Financial, surrender its bank charter, and cease to operate as a separate legal entity. At that time, H&R Block, Inc. and Block Financial would no longer be savings and loan holding companies subject to regulatory oversight of the Federal Reserve or related regulatory capital requirements. Prior to entering into this agreement, Republic Bank filed

2.
Loss Per Share and Stockholders’ Equity
4H&R Block Q1 FY2014 Form 10-Q

Table of Contents

an application with its regulators to convert to a national bank charter which is being processed concurrently with the review of the transaction between H&R Block and Republic Bank. We have received indications that additional time is needed for Republic Bank’s regulators to process their applications. We, therefore, expect to continue offering our financial products and services to our clients through HRB Bank for the 2014 tax season.
We plan to continue to offer financial products and services to our clients subsequent to HRB Bank ceasing operations and we are currently negotiating additional agreements with Republic Bank, including a Joint Marketing Master Services Agreement (MSA Agreement) and a related Receivables Participation Agreement (RPA Agreement), under which Republic Bank will serve as the bank offering H&R Block-branded financial services and products, and we will service and administer such financial services and products for Republic Bank.
We incurred certain fees for professional advisors and accrued employee termination benefits in connection with this pending transaction. Those costs totaled $7.5 million for the quarter ended July 31, 2013.
The obligations of the parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions including regulatory approval and agreement upon, execution and delivery of the MSA Agreement and the RPA Agreement. We cannot be certain when or if these conditions will be satisfied, and therefore we cannot predict the timing or the likelihood of completing the P&A Transaction and ceasing to be regulated as an SLHC.
NOTE 3: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
Basic and diluted loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 7.76.3 million shares and 9.2 million shares for the three and nine months ended JanuaryJuly 31, 2013 and 9.6 million shares for the three and nine months ended January 31, 2012, respectively, as the effect would be antidilutive due to the net loss from continuing operations during those periods.

-4-

The computations of basic and diluted lossearnings per share from continuing operations are as follows:

        (in 000s, except per share amounts) 
    Three months ended
January 31,		  Nine months ended
January 31,		 
    2013  2012  2013  2012 

Net loss from continuing operations attributable to shareholders

  $(16,915)  $(3,567)  $(223,764)  $(245,735) 

Income (loss) allocated to participating securities (nonvested shares)

   62    (24)   199    152  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss from continuing operations attributable to common shareholders

  $(16,977)  $(3,543)  $(223,963)  $(245,887) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic weighted average common shares

   271,542    292,963    273,281    299,450  

Potential dilutive shares

   –    –    –    –  
  

 

 

  

 

 

  

 

 

  

 

 

 

Dilutive weighted average common shares

   271,542    292,963    273,281    299,450  
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss per share from continuing operations:

     

Basic

  $(0.06)  $(0.01)  $(0.82)  $(0.82) 

Diluted

   (0.06)   (0.01)   (0.82)   (0.82) 

(in 000s, except per share amounts) 
Three months ended July 31, 2013
 2012
Net loss from continuing operations attributable to shareholders $(113,270) $(105,650)
Net loss allocated to participating securities (62) (73)
Net loss from continuing operations attributable to common shareholders $(113,332) $(105,723)
     
Basic weighted average common shares 273,080
 277,155
Potential dilutive shares —
 —
Dilutive weighted average common shares 273,080
 277,155
     
Loss per share from continuing operations attributable to common shareholders:    
Basic $(0.42) $(0.38)
Diluted (0.42) (0.38)
The weighted average shares outstanding for the three and nine months ended JanuaryJuly 31, 2013 decreased to 271.5273.1 million and 273.3 from 277.2 million respectively, from 293.0 million and 299.5 million for the three and nine months ended JanuaryJuly 31, 2012 respectively,, primarily due to share repurchases completed during fiscal years 2013 and 2012.year 2013. During the ninethree months ended JanuaryJuly 31, 2013,2012, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0 million. $315.0 million.
During the ninethree months ended JanuaryJuly 31, 2012, we purchased and immediately retired 13.0 million shares of our common stock at a cost of $177.5 million. The cost of shares retired during each period was allocated to the components of stockholders’ equity as follows:

    

(in 000s)

 
Nine months ended January 31,  2013   2012 

Common stock

  $213    $130  

Additional paid-in capital

   12,542     7,826  

Retained earnings

   302,245     169,548  
  

 

 

   

 

 

 
  $315,000    $177,504  
  

 

 

   

 

 

 
   

 

 

   

 

 

 

In addition to the shares we repurchased as described above, during the nine months ended January 31, 2013, we acquired 0.2 million shares of our common stock at an aggregate cost of $2.8 million.$4.2 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the ninethree months ended JanuaryJuly 31, 2012, we acquired 0.20.1 million shares at an aggregate cost of $3.1$1.6 million for similar purposes.

We also retired 60.0 million shares


H&R Block Q1 FY2014 Form 10-Q5
Table of treasury stock duringContents

During the ninethree months ended JanuaryJuly 31, 2013. This retirement of treasury stock had no impact on our total consolidated stockholders’ equity. The cost of treasury shares retired during the current period was allocated to the following components of stockholders’ equity:

    

(in 000s)

Common stock

  $600   

Additional paid-in capital

   35,400   

Retained earnings

   1,104,797   
  

 

 

  

Total cost allocated

   1,140,797   

Less cost of treasury shares retired

   (1,140,797)  
  

 

 

  

Net impact on consolidated stockholders’ equity

  $–   
  

 

 

  
   

 

 

   

-5-

During the nine months ended January 31, 2013 and 2012, we issued 1.31.4 million and 1.00.3 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.

During the ninethree months ended JanuaryJuly 31, 2013, we granted 1.00.8 million stock options and 1.5 million nonvested units under our stock-based compensation plans. The weighted average fair value of options granted was $2.79. Stock options or nonvestedNonvested units granted generally either vest over a three year period with one-third vesting each year or cliff vest at the end of a three-year period. Stock-based compensation expense of our continuing operations totaled $3.7$4.6 million and $11.5$2.4 million for the three and nine months ended JanuaryJuly 31, 2013 respectively, and $2.0 million and $11.0 million for the three and nine months ended January2012, respectively. As of July 31, 2012, respectively. At January 31, 2013, unrecognized compensation cost for options totaled $4.6$2.7 million, and for nonvested shares and units totaled $25.4 million.

3.Receivables

$39.2 million.

NOTE 4: RECEIVABLES
Short-term receivables of our continuing operations consist of the following:

    (in 000s) 
As of  January 31, 2013  January 31, 2012  April 30, 2012 

Emerald Advance lines of credit

  $462,576   $443,717   $23,717  

Receivables for tax preparation and related fees

   250,566    333,636    42,286  

Loans to franchisees

   110,560    81,415    61,252  

Royalties from franchisees

   69,627    88,597    5,781  

RAC fees receivable

   31,680    28,942    –  

Receivable from McGladrey & Pullen LLP

   –    32,342    –  

Other

   68,980    91,392    105,411  
  

 

 

  

 

 

  

 

 

 
   993,989    1,100,041    238,447  

Allowance for doubtful accounts

   (44,829)   (64,139)   (44,589) 
  

 

 

  

 

 

  

 

 

 
  $949,160   $1,035,902   $193,858  
  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

 

(in 000s) 
As of July 31, 2013
 July 31, 2012
 April 30, 2013
Loans to franchisees $64,041
 $60,459
 $65,413
Receivables for tax preparation and related fees 37,547
 35,194
 49,356
Canadian CashBack receivables 2,412
 6,601
 47,658
Emerald Advance lines of credit 22,649
 24,215
 23,218
Royalties from franchisees 4,070
 2,096
 10,722
Credit cards 7,309
 —
 7,733
Other 35,887
 31,269
 53,134
  173,915
 159,834
 257,234
Allowance for doubtful accounts (52,606) (43,477) (50,399)
  $121,309
 $116,357
 $206,835
       
The short-term portion of Emerald Advance lines of credit (EAs), loans made to franchisees, CashBack balances and credit card balances is included in receivables, while the long-term portion is included in other assets in the consolidated balance sheets. These amounts are as follows:

         (in 000s) 
    Emerald Advance
Lines of Credit		   Loans
to Franchisees		   Credit Cards 

As of January 31, 2013:

      

Short-term

  $462,576    $110,560    $4,220  

Long-term

   10,465     127,274     16,045  
  

 

 

   

 

 

   

 

 

 
  $473,041    $237,834    $20,265  
  

 

 

   

 

 

   

 

 

 

As of January 31, 2012:

      

Short-term

  $443,717    $81,415    $–  

Long-term

   15,001     134,136     –  
  

 

 

   

 

 

   

 

 

 
  $458,718    $215,551    $–  
  

 

 

   

 

 

   

 

 

 

As of April 30, 2012:

      

Short-term

  $23,717    $61,252    $–  

Long-term

   13,007     109,837     –  
  

 

 

   

 

 

   

 

 

 
  $ 36,724    $171,089    $–  
  

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

 

-6-

(in 000s) 
  EAs
 Loans
to Franchisees
 CashBack
 Credit Cards
As of July 31, 2013:        
Short-term $22,649
 $64,041
 $2,412
 $7,309
Long-term 6,906
 106,119
 —
 15,446
  $29,555
 $170,160
 $2,412
 $22,755
As of July 31, 2012:        
Short-term $24,215
 $60,459
 $6,601
 $—
Long-term 11,689
 112,810
 —
 —
  $35,904
 $173,269
 $6,601
 $—
As of April 30, 2013:        
Short-term $23,218
 $65,413
 $47,658
 $7,733
Long-term 9,819
 103,047
 —
 15,538
  $33,037
 $168,460
 $47,658
 $23,271
         
Emerald Advance Lines of CreditEAs - . We review the credit quality of our EA receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. These amounts as of JanuaryJuly 31, 2013, by year of origination, are as follows:

         (in 000s)

2013

  $435,117    

2012

   6,936    

2011

   5,992    

2010

   3,493    

2009 and prior

   5,073    

Revolving loans

   16,430    
  

 

 

   
  $473,041    
  

 

 

   
   

 

 

    


6H&R Block Q1 FY2014 Form 10-Q
Table of Contents

(in 000s) 
Credit Quality Indicator – Year of origination:  
2013 $8,657
2012 1,177
2011 2,083
2010 and prior 6,297
Revolving loans 11,341
  $29,555
   
As of JanuaryJuly 31, 2013 January 31, 2012 and 2012 and April 30, 2012, $30.72013, $26.8 million $41.4, $30.3 million and $31.4$30.0 million respectively, of EAs were on non-accrual status and classified as impaired, or more than 60 days past due.

due, respectively.

Loans to Franchisees.Franchisees - Loans made to franchisees at Januaryas of July 31, 2013 totaled $237.8 million, and2012 and April 30, 2013, consisted of $144.5$124.2 million, $129.3 million and $121.2 million, respectively, in term loans made primarily to finance the purchase of franchises and $93.3$46.0 million, $44.0 million and $47.3 million, respectively, in revolving lines of credit made to existing franchisees primarily for the purpose of funding off-season working capital needs. Loans made to franchisees at January
As of July 31, 2012 totaled $215.6 million,2013 and consisted of $150.4 million in term loans2012 and $65.2 million in revolving lines of credit. Loans made to franchisees at April 30, 2012 totaled $171.12013, loans with a principal amount of $2.5 million, $0.5 million and consisted of $127.0$0.1 million in term loans and $44.1 million in revolving lines of credit. As of January 31, 2013,, respectively, were more than 30 days past due, however we had no loans to franchisees that were past due or on non-accrual status.

Credit Cards.Canadian CashBack Program - In November 2012, H&R Block Bank, (HRB Bank) began offering unsecuredDuring the tax season our Canadian operations advance refunds due to certain clients from the Canada Revenue Agency for a fee (the CashBack program). Refunds advanced under the CashBack program are not subject to credit cards. These credit cards are offered to selected customers, primarily previous H&R Block clients, based on their credit profile and have a maximum available credit limit of $2,500. Interest income on credit cards is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or becomes delinquent.

We believe that delinquency rates areapproval, therefore the primary indictorindicator of credit quality; however, we alsoquality is the age of the receivable amount. CashBack amounts are generally received within 60 days of filing the client's return. As of July 31, 2013 and 2012 and April 30, 2013, $0.8 million, $2.6 million and $1.8 million of CashBack balances were more than 60 days old, respectively.

Credit Cards - We utilize a four-tier underwriting approach at origination. Each of the four tiers, with Tier 4 representing the most risk. Each tierrisk, is comprised of a combination of FICO Vantagescores ranging from 521 to 680, generic and industry predictive loss models. Wecustom credit bureau based risk scores and client attributes. The criteria in the tiers are not subsequently updated. The population also includes certain clients which are “un-scorable.” Although we utilize the borrower's credit score for underwriting, we do not consider the borrower’s credit score to be a primary indicatormeasure of credit quality, since it tends to be a lagging indicator of credit quality. All criteria are evaluated at the time of origination, and are not subsequently updated.indicator. Credit card receivable balances as of JanuaryJuly 31, 2013, by credit tier, are as follows:

         (in 000s)

Tier 1

  $3,779    

Tier 2

   8,818    

Tier 3

   2,660    

Tier 4

   5,008    
  

 

 

   
   $20,265    
  

 

 

   
   

 

 

    

Credit

(in 000s) 
Tier 1 $5,127
Tier 2 9,532
Tier 3 2,815
Tier 4 5,281
  $22,755
   
An aging of our credit card receivables are evaluated for impairment when they become delinquent. Amounts deemed to be uncollectible are charged off against the related allowance. receivable balances as of July 31, 2013 is as follows :
(in 000s) 
Current $13,740
Less than 30 days past due 1,778
30 - 59 days past due 1,262
60 - 89 days past due 1,312
90 days or more past due 4,663
  $22,755
   

H&R Block Q1 FY2014 Form 10-Q7
Table of Contents

As of JanuaryJuly 31, 2013 none and April 30, 2013, a total of these$1.1 million and $2.1 million in unamortized deferred fees and costs were capitalized related to our credit card balances, wererespectively.
Long-Term Note Receivable - We have a long-term note receivable in the amount of $54.0 million due from McGladrey & Pullen LLP (M&P) related to the sale of RSM McGladrey, Inc. (RSM) in November 2011. This note is unsecured and bears interest at a rate of 8.0%, with all principal and accrued interest due in May 2017. As of July 31, 2013, there is no allowance recorded related to this note. We continue to monitor publicly available information relevant to the financial condition of M&P to assess future collectibility. This note is included in other assets on non-accrual statusthe consolidated balance sheet, with a total of $61.6 million, $56.9 million and classified as impaired, or more than 60 days past due. Payments on past due amounts are$60.4 million in principal and accrued interest recorded as a reduction in the receivable balance.

-7-

of July 31, 2013 and 2012 and April 30, 2013, respectively.

Allowance for Doubtful Accounts.Accounts - Activity in the allowance for doubtful accounts for our short-term and long-term receivables for the ninethree months ended JanuaryJuly 31, 2013 and 2012 is as follows:

    (in 000s) 
    Balance as of
April 30, 2012		   Provision   Charge-offs   Balance as of
January 31, 2013		 

Emerald Advance lines of credit

  $6,200    $25,519    $–    $31,719  

Loans to franchisees

   –     42     –     42  

Credit cards

   –     4,255     –     4,255  

All other receivables

   38,389     10,666     (40,242)    8,813  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $44,589    $40,482    $(40,242)   $44,829  
  

 

 

   

 

 

   

 

 

   

 

 

 
     
    Balance as of
April 30, 2011		   Provision   Charge-offs   Balance as of
January 31, 2012		 

Emerald Advance lines of credit

  $4,400    $33,570    $–    $37,970  

Loans to franchisees

   –     –    ��–     –  

Credit cards

   –     –     –     –  

All other receivables

   43,543     17,062     (34,436)    26,169  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $47,943    $50,632    $(34,436)   $64,139  
  

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

 

We recorded an allowance for credit card receivables equal to 21% of amounts outstanding, based on industry information for similar credit cards. We will adjust our allowance in the future as payment and delinquency trends become available.

(in 000s) 
  EAs
 Loans
to Franchisees
 CashBack
 Credit Cards
 All Other
 Total
Balance as of May 1, 2013 $7,390
 $—
 $2,769
 $7,304
 $40,240
 $57,703
Provision —
 —
 158
 2,367
 534
 3,059
Charge-offs —
 —
 (673) (2,523) (688) (3,884)
Balance as of July 31, 2013 $7,390
 $—
 $2,254
 $7,148
 $40,086
 $56,878
             
Balance as of May 1, 2012 $6,200
 $—
 $2,279
 $—
 $36,110
 $44,589
Provision —
 —
 225
 —
 72
 297
Charge-offs —
 —
 (972) —
 (437) (1,409)
Balance as of July 31, 2012 $6,200
 $—
 $1,532
 $—
 $35,745
 $43,477
             
There were no changes to our methodology related to the calculation of our allowance for doubtful accounts during the nine months ended January 31, 2013.

4.Mortgage Loans Held for Investment and Related Assets

fiscal year 2014.

NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT AND RELATED ASSETS
The composition of our mortgage loan portfolio as of January 31, 2013 and April 30, 2012 is as follows:

    

(dollars in 000s)

 
As of  January 31, 2013   April 30, 2012 
    Amount  % of Total   Amount   % of Total 

Adjustable-rate loans

  $203,624    55%    $238,442     56%  

Fixed-rate loans

   168,515    45%     190,870     44%  
  

 

 

  

 

 

   

 

 

   

 

 

 
   372,139    100%     429,312     100%  

Unamortized deferred fees and costs

   3,004      3,429    

Less: Allowance for loan losses

   (17,256)     (26,540)    
  

 

 

    

 

 

   
   $357,887     $406,201    
  

 

 

    

 

 

   
   

 

 

       

 

 

      

(dollars in 000s) 
As of July 31, 2013 July 31, 2012 April 30, 2013
  Amount
 % of Total
 Amount
 % of Total
 Amount
 % of Total
Adjustable-rate loans $174,481
 54% $222,474
 55% $191,093
 55%
Fixed-rate loans 147,973
 46% 183,196
 45% 159,142
 45%
  322,454
 100% 405,670
 100% 350,235
 100%
Unamortized deferred fees and costs 2,741
   3,274
   2,868
  
Less: Allowance for loan losses (15,514)   (22,185)   (14,314)  
  $309,681
   $386,759
   $338,789
  
             
Our loan loss allowance as a percent of mortgage loans was 4.6% at January4.8% as of July 31, 2013, compared to 6.2% at5.5% as of July 31, 2012 and 4.1% as of April 30, 2012.

2013.


8H&R Block Q1 FY2014 Form 10-Q
Table of Contents

Activity in the allowance for loan losses for the ninethree months ended JanuaryJuly 31, 2013 and 2012 is as follows:

    (in 000s) 
Nine months ended January 31,  2013  2012 

Balance, beginning of the period

  $26,540   $92,087  

Provision

   10,250    17,275  

Recoveries

   2,745    160  

Charge-offs

   (22,279)   (19,573) 
  

 

 

  

 

 

 

Balance, end of the period

  $17,256   $89,949  
  

 

 

  

 

 

 
   

 

 

  

 

 

 

-8-

Our allowance decreased significantly

(in 000s) 
Three months ended July 31, 2013
 2012
Balance at beginning of the period $14,314
 $26,540
Provision 7,603
 4,000
Recoveries 767
 1,186
Charge-offs (7,170) (9,541)
Balance at end of the period $15,514
 $22,185
     
As of July 31, 2013, we had $7.6 million of mortgage loans which were transferred into the held-for-sale portfolio from the prior year primarily due to a change inheld-for-investment portfolio. At the fourth quarter of fiscal year 2012, whereby we now charge-off loans 180 days past due to the valuetime of the collateral less coststransfer, the amount by which cost exceeded fair value totaled $2.9 million. This write-down to sell. This change did not havefair value was recorded as a significant impact on our provision recorded during the ninethree months ended JanuaryJuly 31, 2013.

2013 and subsequently charged-off.

When determining our allowance for loan losses, we evaluate loans less than 60 days past due on a pooled basis, while loans we consider impaired, including those loans more than 60 days past due or modified as troubled debt restructurings (TDRs),TDRs, are evaluated individually. The balance of these loans and the related allowance is as follows:

    (in 000s) 
As of  January 31, 2013   April 30, 2012 
    Portfolio Balance   Related Allowance   Portfolio Balance   Related Allowance 

Pooled

   $    219,345     $      6,670     $    248,772     $      9,237  

Impaired:

        

Individually (TDRs)

   59,295     5,013     71,949     7,752  

Individually

   93,499     5,573     108,591     9,551  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $    372,139     $    17,256     $    429,312     $    26,540  
  

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

 

Our portfolio includes loans originated by Sand Canyon Corporation, previously known as Option One Mortgage Corporation, and its subsidiaries (SCC) and purchased by HRB Bank, which constitute 57% of the total loan portfolio at January 31, 2013. We have experienced higher rates of delinquency and believe that we have greater exposure to loss with respect to this segment of our loan portfolio. Our remaining loan portfolio is characteristic of a prime loan portfolio, and we believe therefore subject to a lower loss exposure.

(in 000s) 
As of July 31, 2013 July 31, 2012 April 30, 2013
  Portfolio 
Balance
 Related 
Allowance
 Portfolio 
Balance
 Related 
Allowance
 Portfolio 
Balance
 Related 
Allowance
Pooled (less than 60 days past due) $186,082
 $5,734
 $238,999
 $7,701
 $207,319
 $5,628
Impaired:            
Individually (TDRs) 50,136
 4,866
 67,587
 6,931
 55,061
 4,924
Individually (60 days or more past due) 86,236
 4,914
 99,084
 7,553
 87,855
 3,762
  $322,454
 $15,514
 $405,670
 $22,185
 $350,235
 $14,314
             
Detail of our mortgage loans held for investment and the related allowance at Januaryas of July 31, 2013 is as follows:

    (dollars in 000s) 
   Outstanding   Loan Loss Allowance  % 30+ Days 
    Principal Balance   Amount   % of Principal  Past Due 

Purchased from SCC

  $212,250    $13,596     6.4%   34.5% 

All other

   159,889     3,660     2.3%   9.2% 
  

 

 

   

 

 

   

 

 

  

 

 

 
  $372,139    $17,256     4.6%   23.6% 
  

 

 

   

 

 

   

 

 

  

 

 

 
   

 

 

   

 

 

   

 

 

  

 

 

 

(dollars in 000s) 
  Outstanding Principal Balance
 Loan Loss Allowance 
% 30+ Days
Past Due

   Amount
 % of Principal
 
Purchased from SCC $183,551
 $11,912
 6.5% 32.7%
All other 138,903
 3,602
 2.6% 9.2%
  $322,454
 $15,514
 4.8% 22.6%
         

H&R Block Q1 FY2014 Form 10-Q9
Table of Contents

Credit quality indicators at Januaryas of July 31, 2013 include the following:

    (in 000s) 
Credit Quality Indicators  Purchased from SCC     All Other     Total Portfolio 

Occupancy status:

          

Owner occupied

  $154,470      $102,180      $256,650  

Non-owner occupied

   57,780       57,709       115,489  
  

 

 

     

 

 

     

 

 

 
  $212,250      $159,889      $372,139  
  

 

 

     

 

 

     

 

 

 

Documentation level:

          

Full documentation

  $68,413      $116,591      $185,004  

Limited documentation

   6,889       16,775       23,664  

Stated income

   118,100       16,385       134,485  

No documentation

   18,848       10,138       28,986  
  

 

 

     

 

 

     

 

 

 
  $212,250      $159,889      $372,139  
  

 

 

     

 

 

     

 

 

 

Internal risk rating:

          

High

  $68,645      $–      $68,645  

Medium

   143,605       –       143,605  

Low

   –       159,889       159,889  
  

 

 

     

 

 

     

 

 

 
  $212,250      $159,889     ��$372,139  
  

 

 

     

 

 

     

 

 

 
   

 

 

     

 

 

     

 

 

 

-9-

(in 000s) 
Credit Quality Indicators Purchased from SCC
 All Other
 Total Portfolio
Occupancy status:      
Owner occupied $134,582
 $88,841
 $223,423
Non-owner occupied 48,969
 50,062
 99,031
  $183,551
 $138,903
 $322,454
Documentation level:      
Full documentation $60,826
 $101,226
 $162,052
Limited documentation 6,069
 14,132
 20,201
Stated income 101,995
 14,443
 116,438
No documentation 14,661
 9,102
 23,763
  $183,551
 $138,903
 $322,454
Internal risk rating:      
High $56,475
 $—
 $56,475
Medium 127,076
 —
 127,076
Low —
 138,903
 138,903
  $183,551
 $138,903
 $322,454
       
Loans given our internal risk rating of “high” were originated by SCC,Sand Canyon Corporation, formerly known as Option One Mortgage Corporation, and its subsidiaries (SCC), and generally had no documentation or were based on stated income. Loans given our internal risk rating of “medium” were generally full documentation or based on stated income, with loan-to-value ratios at origination of more than 80%, and were made to borrowers with credit scores below 700 at origination. Loans given our internal risk rating of “low” were generally full documentation,obtained from parties other than SCC, with loan-to-value ratios at origination of less than 80% and were made to borrowers with credit scores greater than 700 at origination.

Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. Approximately 58%59% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California, New York and Wisconsin.

Detail of the aging of the mortgage loans in our portfolio as of JanuaryJuly 31, 2013 is as follows:

    (in 000s) 
    Less than 60
Days Past Due		   60–89 Days
Past Due		   90+ Days
Past Due (1)		   Total
Past Due		   Current   Total 

Purchased from SCC

   $16,752     $3,084     $69,905    $89,741    $122,509    $212,250  

All other

   7,168     1,089     12,931     21,188     138,701     159,889  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $23,920     $4,173     $82,836    $110,929    $261,210    $372,139  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)      We do not accrue interest on loans past due 90 days or more.

         

(in 000s) 
  
Less than 60
Days Past Due

 
60 – 89 Days
Past Due

 
90+ Days
Past Due(1)

 
Total
Past Due

 Current
 Total
Purchased from SCC $11,890
 $2,724
 $61,237
 $75,851
 $107,700
 $183,551
All other 5,266
 —
 12,311
 17,577
 121,326
 138,903
  $17,156
 $2,724
 $73,548
 $93,428
 $229,026
 $322,454
             
(1)
We do not accrue interest on loans past due 90 days or more.

10H&R Block Q1 FY2014 Form 10-Q
Table of Contents

Information related to our non-accrual loans is as follows:

    (in 000s) 
As of  January 31, 2013   April 30, 2012 

Loans:

    

Purchased from SCC

  $76,235    $88,347  

Other

   15,761     16,626  
  

 

 

   

 

 

 
   91,996     104,973  
  

 

 

   

 

 

 

TDRs:

    

Purchased from SCC

   3,460     3,166  

Other

   504     1,270  
  

 

 

   

 

 

 
   3,964     4,436  
  

 

 

   

 

 

 

Total non-accrual loans

  $95,960    $109,409  
  

 

 

   

 

 

 
   

 

 

   

 

 

 

(in 000s) 
As of July 31, 2013
 July 31, 2012
 April 30, 2013
Loans:      
Purchased from SCC $68,740
 $81,539
 $70,327
Other 14,860
 16,178
 14,906
  83,600
 97,717
 85,233
TDRs:      
Purchased from SCC 3,247
 3,398
 3,719
Other 500
 509
 502
  3,747
 3,907
 4,221
Total non-accrual loans $87,347
 $101,624
 $89,454
       
Information related to impaired loans is as follows:

                   (in 000s) 
    Balance With
Allowance		   Balance With
No Allowance		   Total
Impaired Loans		   Related
Allowance		 

As of January 31, 2013:

        

Purchased from SCC

   $38,938     $  88,671     $127,609     $  8,470  

Other

   6,757     18,428     25,185     2,116  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $45,695     $107,099     $152,794     $10,586  
  

 

 

   

 

 

   

 

 

   

 

 

 

As of April 30, 2012:

        

Purchased from SCC

   $56,128     $  97,591     $153,719     $14,917  

Other

   7,137     19,684     26,821     2,386  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $63,265     $117,275     $180,540     $17,303  
  

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

 

-10-

(in 000s) 
  Balance
With Allowance
 Balance
With No Allowance
 Total
Impaired Loans
 Related Allowance
As of July 31, 2013:        
Purchased from SCC $33,088
 $80,132
 $113,220
 $7,396
Other 6,603
 16,549
 23,152
 2,384
  $39,691
 $96,681
 $136,372
 $9,780
As of July 31, 2012:        
Purchased from SCC $45,719
 $94,184
 $139,903
 $11,653
Other 8,199
 18,569
 26,768
 2,831
  $53,918
 $112,753
 $166,671
 $14,484
As of April 30, 2013:        
Purchased from SCC $33,791
 $84,592
 $118,383
 $6,573
Other 7,601
 16,932
 24,533
 2,113
  $41,392
 $101,524
 $142,916
 $8,686
         
Information related to the allowance for impaired loans is as follows:

         (in 000s) 
As of  January 31, 2013   April 30, 2012 

Portion of total allowance for loan losses allocated
to impaired loans and TDR loans:

    

Based on collateral value method

   $  5,573     $  9,551  

Based on discounted cash flow method

   5,013     7,752  
  

 

 

   

 

 

 
   $10,586     $17,303  
  

 

 

   

 

 

 
   

 

 

   

 

 

 

(in 000s) 
As of July 31, 2013
 July 31, 2012
 April 30, 2013
Portion of total allowance for loan losses allocated to impaired loans and TDR loans:      
Based on collateral value method $4,914
 $7,553
 $3,762
Based on discounted cash flow method 4,866
 6,931
 4,924
  $9,780
 $14,484
 $8,686
       

H&R Block Q1 FY2014 Form 10-Q11
Table of Contents

Information related to activities of our non-performing assets is as follows:

         (in 000s) 
Nine months ended January 31,  2013   2012 

Average impaired loans:

    

Purchased from SCC

  $137,703    $224,002  

All other

   25,879     35,421  
  

 

 

   

 

 

 
  $163,582    $259,423  
  

 

 

   

 

 

 

Interest income on impaired loans:

    

Purchased from SCC

  $2,940    $4,340  

All other

   232     348  
  

 

 

   

 

 

 
  $3,172    $4,688  
  

 

 

   

 

 

 

Interest income on impaired loans recognized on a
cash basis on non-accrual status:

    

Purchased from SCC

  $2,881    $4,182  

All other

   214     324  
  

 

 

   

 

 

 
  $3,095    $4,506  
  

 

 

   

 

 

 
   

 

 

   

 

 

 

(in 000s) 
As of July 31, 2013
 July 31, 2012
 April 30, 2013
Average impaired loans:      
Purchased from SCC $130,287
 $147,555
 $133,936
All other 25,328
 26,841
 25,425
  $155,615
 $174,396
 $159,361
Interest income on impaired loans:      
Purchased from SCC $848
 $1,011
 $3,825
All other 73
 82
 305
  $921
 $1,093
 $4,130
Interest income on impaired loans recognized on a cash basis on non-accrual status:      
Purchased from SCC $820
 $994
 $3,746
All other 73
 73
 279
  $893
 $1,067
 $4,025
       
Activity related to our real estate owned (REO) is as follows:

        (in 000s) 
Nine months ended January 31,  2013  2012 

Balance, beginning of the period

  $14,972   $19,532  

Additions

   7,208    6,521  

Sales

   (6,652)   (7,933) 

Writedowns

   (1,676)   (2,193) 
  

 

 

  

 

 

 

Balance, end of the period

  $13,852   $15,927  
  

 

 

  

 

 

 
   

 

 

  

 

 

 

-11-

(in 000s) 
Three months ended July 31, 2013
 2012
Balance, beginning of the period $13,968
 $14,972
Additions 2,100
 3,074
Sales (1,664) (1,801)
Impairments (487) (788)
Balance, end of the period $13,917
 $15,457
     



5.
Investments in Available-for-Sale Securities
12H&R Block Q1 FY2014 Form 10-Q

Table of Contents

NOTE 6: INVESTMENTS
AVAILABLE-FOR-SALE – The amortized cost and fair value of securities classified as available-for-sale (AFS) held at January 31, 2013 and April 30, 2012 are summarized below:

                               (in 000s) 
As of January 31, 2013  April 30, 2012 
   Amortized
Cost		  Gross
Unrealized
Gains		  Gross
Unrealized
Losses(1)		  Fair Value  Amortized
Cost		  

Gross

Unrealized
Gains

  

Gross

Unrealized
Losses(1)

  Fair Value 

Short-term:

        

Municipal bonds

 $1,000   $1   $–   $1,001   $1,008   $29   $–   $1,037  

Long-term:

        

Mortgage-backed securities

  386,741    5,825    (780)   391,786    361,184    5,620    (121)   366,683  

Municipal bonds

  4,192    334    –    4,526    4,236    396    –    4,632  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  390,933    6,159    (780)   396,312    365,420    6,016    (121)   371,315  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $391,933   $6,160   $(780)  $397,313   $366,428   $6,045   $(121)  $372,352  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)      At January 31, 2013, we had no securities that had been in a continuous loss position for more than twelve months. At April 30, 2012, mortgage-backed securities with a cost of $8.1 million and gross unrealized losses of $21 thousand had been in a continuous loss position for more than twelve months.

           

During

(in 000s) 
  Amortized
Cost
 Gross
Unrealized
Gains
 
Gross
Unrealized
Losses (1)

 Fair Value
As of July 31, 2013:        
Long-term:        
Mortgage-backed securities $489,401
 $3,825
 $(10,623) $482,603
Municipal bonds 4,164
 266
 —
 4,430
  $493,565
 $4,091
 $(10,623) $487,033
As of July 31, 2012:        
Short-term:        
Municipal bonds $1,006
 $20
 $—
 $1,026
Long-term:        
Mortgage-backed securities 370,318
 5,898
 (78) 376,138
Municipal bonds 4,221
 406
 —
 4,627
  374,539
 6,304
 (78) 380,765
  $375,545
 $6,324
 $(78) $381,791
As of April 30, 2013  
Long-term:        
Mortgage-backed securities $476,450
 $6,592
 $(664) $482,378
Municipal bonds 4,178
 320
 —
 4,498
  $480,628
 $6,912
 $(664) $486,876
         
(1)
As of July 31, 2013 and April 30, 2013, we had no securities that had been in a continuous loss position for more than twelve months. As of July 31, 2012, mortgage-backed securities with a cost of $7.9 million and gross unrealized losses of $5 thousand had been in a continuous loss position for more than twelve months.
We did not sell any AFS securities during the ninethree months ended JanuaryJuly 31, 2013 we received proceeds from the sale of AFS securities of $5.2 million and recorded a gross realized gain of $0.2 million on this sale.2012. We had no salesdid not record any other-than-temporary impairments of AFS securities during the ninethree months ended JanuaryJuly 31, 2012.

2013 and 2012.

Contractual maturities of AFS debt securities at JanuaryJuly 31, 2013, occur at varying dates over the next 30 years, and are set forth in the table below.

         (in 000s) 
As of January 31, 2013  Cost Basis   Fair Value 

Maturing in:

    

Less than one year

  $1,000    $1,001  

Two to five years

   4,192     4,526  

More than five years

   386,741     391,786  
  

 

 

   

 

 

 
  $391,933    $397,313  
  

 

 

   

 

 

 
   

 

 

   

 

 

 

(in 000s) 
  Amortized Cost
 Fair Value
Maturing in:    
Two to five years $4,164
 $4,430
Beyond 489,401
 482,603
  $493,565
 $487,033
     


6.
Goodwill and Intangible Assets
H&R Block Q1 FY2014 Form 10-Q13

Table of Contents

NOTE 7: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill of our Tax Services segment for the ninethree months ended JanuaryJuly 31, 2013 consist of the following:

(in 000s)
Tax Services

Balance at April 30, 2012:

Goodwill

$459,863

Accumulated impairment losses

(32,297) 

427,566

Changes:

Acquisitions

7,650

Disposals and foreign currency changes, net

40

Balance at January 31, 2013:

Goodwill

467,553

Accumulated impairment losses

(32,297) 

$435,256

-12-

and 2012 are as follows:

(in 000s) 
  Goodwill
 Accumulated Impairment Losses
 Net
Balances as of April 30, 2013 $467,079
 $(32,297) $434,782
Acquisitions 2,155
 —
 2,155
Disposals and foreign currency changes, net (1,270) —
 (1,270)
Impairments —
 —
 —
Balances as of July 31, 2013 $467,964
 $(32,297) $435,667
       
Balances as of April 30, 2012 $459,863
 $(32,297) $427,566
Acquisitions 3,651
 —
 3,651
Disposals and foreign currency changes, net (116) —
 (116)
Impairments —
 —
 —
Balances as of July 31, 2012 $463,398
 $(32,297) $431,101
       
We test goodwill for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value.

Intangible


14H&R Block Q1 FY2014 Form 10-Q
Table of Contents

Components of the intangible assets of our Tax Services segment consist of the following:

                           (in 000s) 
As of  January 31, 2013   April 30, 2012 
    Gross
Carrying
Amount		   Accumulated
Amortization		  Net   Gross
Carrying
Amount		   

Accumulated

Amortization

  Net 

Reacquired franchise rights

  $214,330     $(17,174)  $197,156    $214,330     $(14,083)  $200,247  

Customer relationships

   108,596     (52,820)   55,776     90,433     (46,504)   43,929  

Noncompete agreements

   23,054     (21,627)   1,427     22,337     (21,425)   912  

Franchise agreements

   19,201     (5,334)   13,867     19,201     (4,373)   14,828  

Purchased technology

   14,800     (11,911)   2,889     14,700     (10,665)   4,035  

Trade name

   1,300     (892)   408     1,300     (800)   500  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 
  $381,281     $(109,758)  $271,523    $362,301     $(97,850)  $264,451  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 
   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

are as follows:

(in 000s) 
  
Gross
Carrying
Amount

 
Accumulated
Amortization

 Net
As of July 31, 2013:      
Reacquired franchise rights $214,330
 $(19,235) $195,095
Customer relationships 100,688
 (51,007) 49,681
Internally-developed software 93,739
 (74,572) 19,167
Noncompete agreements 23,024
 (21,789) 1,235
Franchise agreements 19,201
 (5,974) 13,227
Purchased technology 14,800
 (12,750) 2,050
Trade name 300
 (300) —
  $466,082
 $(185,627) $280,455
As of July 31, 2012:      
Reacquired franchise rights $214,330
 $(15,113) $199,217
Customer relationships 89,839
 (48,298) 41,541
Internally-developed software 105,648
 (94,240) 11,408
Noncompete agreements 22,225
 (21,443) 782
Franchise agreements 19,201
 (4,694) 14,507
Purchased technology 14,700
 (11,080) 3,620
Trade name 1,300
 (842) 458
  $467,243
 $(195,710) $271,533
As of April 30, 2013      
Reacquired franchise rights $214,330
 $(18,204) $196,126
Customer relationships 100,719
 (48,733) 51,986
Internally-developed software 91,745
 (72,764) 18,981
Noncompete agreements 23,058
 (21,728) 1,330
Franchise agreements 19,201
 (5,654) 13,547
Purchased technology 14,800
 (12,331) 2,469
Trade name 300
 (300) —
  $464,153
 $(179,714) $284,439
       
Amortization of intangible assets of our continuing operations for the three and nine months ended JanuaryJuly 31, 2013 totaled $4.6 and $14.42012 was $6.1 million and $6.0 million, respectively. Amortization of intangible assets of our continuing operations for the three and nine months ended January 31, 2012 totaled $4.7 and $15.2 million, respectively. Additionally, we recorded an impairment of customer relationships of $4.0 million during the prior year period related to the discontinuation of the ExpressTax brand. Estimated amortization of intangible assets for fiscal years 2013 through 2014, 2015, 2016, 2017 and 2018 is $17.6$23.2 million $17.1, $19.4 million $13.7, $16.0 million $13.1, $13.2 million and $12.4$12.2 million, respectively.

7.Borrowings

Borrowings consist of the following:

            (in 000s) 
As of  January 31, 2013  January 31, 2012  April 30, 2012 

Commercial paper outstanding

  $424,967   $230,947   $           –  

Senior Notes, 5.500%, due November 2022

  $497,260   $           –   $           –  

Senior Notes, 5.125%, due October 2014

   399,588    399,364    399,412  

Senior Notes, 7.875%, due January 2013

   –    599,871    599,913  

Other

   9,877    41,002    41,224  
  

 

 

  

 

 

  

 

 

 

Total long-term debt

   906,725    1,040,237    1,040,549  

Less: Current portion

   (713)   (630,996)   (631,434) 
  

 

 

  

 

 

  

 

 

 
  $906,012   $409,241   $409,115  
  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

 

We had commercial paper borrowings of $425.0 million at January 31, 2013, compared to $230.9 million at the same time last year. These borrowings were used to fund our off-season losses and cover our seasonal working capital needs.

On October 25, 2012, we issued $500.0 million of 5.50% Senior Notes. The Senior Notes are due November 1, 2022, and are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. On October 25, 2012, we provided notice to the trustee of our intention to redeem the entire principal amount of the $600.0 million Senior Notes due in January 2013. The redemption settled on November 26, 2012 at a price of $623.0 million, which included full payment of principal, a make-whole premium of $5.8 million and interest accrued up to the redemption date of $17.2 million. Proceeds of the $500.0 million Senior Notes and other cash balances were used to repay the $600.0 million Senior Notes. We recognized a loss on the extinguishment of this debt of $5.8 million during the three months ended January 31, 2013, which primarily represents the interest that would have been paid on these notes if they had not been redeemed prior to maturity. This loss is included in other income (expense), net on our consolidated statements of operations.

-13-

In August 2012, we terminated our previous committed line of credit (CLOC) agreement and we entered into a new five-year, $1.5 billion Credit and Guarantee Agreement (2012 CLOC). Funds available under the 2012 CLOC may be used for general corporate purposes or for working capital needs. The 2012 CLOC bears interest at an annual rate of LIBOR plus an applicable rate ranging from 0.750% to 1.45% or PRIME plus an applicable rate ranging from 0.000% to 0.450% (depending on the type of borrowing and our then current credit ratings) and includes an annual facility fee ranging from 0.125% to 0.300% of the committed amounts (also depending on our then current credit ratings). The 2012 CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio calculated on a consolidated basis of no greater than (a) 3.50 for the fiscal quarters ending on April 30, July 31, and October 31 of each year and (b) 3.75 for the fiscal quarter ending on January 31 of each year; (2) a covenant requiring us to maintain an interest coverage (EBITDA-to-interest expense) ratio calculated on a consolidated basis of not less than 2.50 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur additional debt, incur liens, merge or consolidate with other companies, sell or dispose of their respective assets (including equity interests), liquidate or dissolve, make investments, loans, advances, guarantees and acquisitions, and engage in certain transactions with affiliates or certain restrictive agreements. The 2012 CLOC includes provisions for an equity cure which could potentially allow us to independently cure a default. We had no balances outstanding under the 2012 CLOC at January 31, 2013. However, we may borrow amounts under the 2012 CLOC from time to time in the future to support working capital requirements or for other general corporate purposes.

8.Fair Value

Fair Value Measurement

NOTE 8: FAIR VALUE
FAIR VALUE MEASUREMENT
We use the following classification of financial instruments pursuant to the fair value hierarchy methodologies for assets measured at fair value:

▪Level 1 - inputs to the valuation are quoted prices in an active market for identical assets.
▪Level 2 - inputs to the valuation include quoted prices for similar assets in active markets utilizing a third-party pricing service to determine fair value.
▪Level 3 - valuation is based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset.

Level 1 – inputs to the valuation are quoted prices in an active market for identical assets.

Level 2 – inputs to the valuation include quoted prices for similar assets in active markets utilizing a third–party pricing service to determine fair value.

Level 3 – valuation is based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset.

Financial instruments are broken downpresented in the tables that follow by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial

H&R Block Q1 FY2014 Form 10-Q15
Table of Contents

statements at each reporting date. Assets measured on a nonrecurring basis are assets that, as a result of an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

The following table presents the assets that were remeasured at fair value on a recurring basis during the ninethree months ended JanuaryJuly 31, 2013 and 2012:
(dollars in 000s) 
  Total
 Level 1
 Level 2
 Level 3
 Gains (losses)
As of July 31, 2013:          
Mortgage–backed securities $482,603
 $—
 $482,603
 $—
 $(6,798)
Municipal bonds 4,430
 —
 4,430
 —
 266
Mortgage loans held for sale 7,608
 —
 —
 7,608
 (2,916)
  $494,641
 $—
 $487,033
 $7,608
 $(9,448)
As a percentage of total assets 13.1% —% 12.9% 0.2%  
           
As of July 31, 2012:          
Mortgage–backed securities $376,138
 $—
 $376,138
 $—
 $5,820
Municipal bonds 5,653
 —
 5,653
 —
 426
  $381,791
 $—
 $381,791
 $—
 $6,246
As a percentage of total assets 10.6% —% 10.6% —%  
           
Our investments in mortgage-backed securities and the unrealized gains on those remeasurements:

    (dollars in 000s) 
    Total  Level 1  Level 2  Level 3  Gain 

January 31, 2013:

      

Mortgage-backed securities

  $391,786   $  –   $391,786    $    –   $5,045  

Municipal bonds

   5,527    –    5,527    –    335  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $397,313   $  –   $397,313    $    –   $5,380  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As a percentage of total assets

   10.1%    –%    10.1%    –%   

January 31, 2012:

      

Mortgage-backed securities

  $306,475   $  –   $306,475    $    –   $2,956  

Municipal bonds

   7,712    –    7,712    –    451  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $314,187   $  –   $314,187    $    –   $3,407  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As a percentage of total assets

   6.5%   –%   6.5%   –%     

-14-

These AFS securitiesmunicipal bonds are carried at fair value on a recurring basis.basis with gains and losses reported as a component of other comprehensive income, except for losses assessed to be other than temporary. These include certain agency and agency-sponsored mortgage-backed securities and municipal bonds. Quoted market prices are not available for these securities.securities, as they are not actively traded and have fewer observable transactions. As a result, we use a third-party pricing serviceservices to determine fair value and classify the securities as Level 2. The service’sthird-party pricing model isservices' models are based on market data and utilizesutilize available trade, bid and other market information for similar securities. The fair values provided by the third-party pricing services are regularly reviewed by management. Annually, a sample of prices supplied by the third-party pricing service are reviewed andis validated by management of HRB Bank.comparison to prices obtained from other third party sources. There were no transfers of AFS securities between hierarchy levels during the ninethree months ended JanuaryJuly 31, 2013 and 2012.

2012.

The fair value of our mortgage loans held for sale is determined using market pricing sources without adjustments and are based on projected future cash flows of each individual asset, and loan characteristics including channel and performance characteristics. These loans are classified as Level 3.

16H&R Block Q1 FY2014 Form 10-Q
Table of Contents

The following table presents the assets that were remeasured at fair value on a non-recurring basis during the ninethree months ended JanuaryJuly 31, 2013 and 2012 and the realized losses on those remeasurements:

    (dollars in 000s) 
    Total  Level 1  Level 2  Level 3  Loss 

January 31, 2013:

      

REO

  $14,683   $  –   $  –   $14,683   $(350) 

Impaired mortgage loans held for investment

   87,949    –    –    87,949    (8,509) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $102,632   $  –   $  –   $102,632   $(8,859) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As a percentage of total assets

   2.6%    –%    –%    2.6%   

January 31, 2012:

      

REO

   16,883    –    –    16,883    (772) 

Impaired mortgage loans held for investment

   103,509    –    –    103,509    (6,986) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $120,392   $  –   $  –   $120,392   $(7,758) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As a percentage of total assets

   2.5%   –%   –%   2.5%     

:

(dollars in 000s) 
  Total
 Level 1
 Level 2
 Level 3
 Losses
As of July 31, 2013:          
REO $14,752
 $—
 $—
 $14,752
 $(353)
Impaired mortgage loans held for investment 76,699
 —
 —
 76,699
 (1,390)
  $91,451
 $—
 $—
 $91,451
 $(1,743)
As a percentage of total assets 2.4% —
 —
 2.4%  
           
As of July 31, 2012:          
REO $16,384
 $—
 $—
 $16,384
 $(261)
Impaired mortgage loans held for investment 93,666
 —
 —
 93,666
 (4,337)
  $110,050
 $—
 $—
 $110,050
 $(4,598)
As a percentage of total assets 3.1% —
 —
 3.1%  
           
The following methods were used to estimate the fair value of each class of financial instrument above:

▪Real estate owned - REO includes foreclosed properties securing mortgage loans. Foreclosed assets are recorded at estimated fair value, generally based on independent market prices or appraised values of the collateral, less costs to sell upon foreclosure. The assets are remeasured quarterly based on independent appraisals or broker price opinions. Subsequent holding period gains and losses arising from the sale of REO are reported when realized. Because our REO is valued based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset, these assets are classified as Level 3.
▪Impaired mortgage loans held for investment - The fair value of impaired mortgage loans held for investment is generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. Impaired and TDR loans are required to be evaluated at least annually, based on HRB Bank's Loan Policy. Impaired loans are typically remeasured every nine months, while TDRs are evaluated quarterly. These loans are classified as Level 3.

Real estate owned – REO includes foreclosed properties securing mortgage loans. Foreclosed assets are recorded at estimated fair value, generally based on independent market prices or appraised values of the collateral, less costs to sell upon foreclosure. The assets are remeasured quarterly based on independent appraisals or broker price opinions. Subsequent holding period gains and losses arising from the sale of REO are reported when realized. Because our REO is valued based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset, these assets are classified as Level 3.

Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment is generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. Impaired and TDR loans are required to be evaluated at least annually, based on HRB Bank’s Loan Policy. Impaired loans are typically remeasured every nine months, while TDRs are evaluated quarterly. These loans are classified as Level 3.

We have established various controls and procedures to ensure that the unobservable inputs used in the fair value measurement of these instruments are appropriate. Appraisals are obtained from certified appraisers and reviewed internally by HRB Bank’s asset management group. The inputs and assumptions used in our discounted cash flow model for TDRs are reviewed and approved by HRB Bank’sBank's management team each time the balances are remeasured. Significant changes in fair value from the previous measurement are presented to HRB Bank management for approval. There were no changes to the unobservable inputs used in determining the fair values of our Level 3 financial assets.

-15-

The following table presents the quantitative information about our Level 3 fair value measurements:

measurements, where the significant unobservable inputs were developed by HRB Bank's management team:
(in 000s)
  
Fair Value at
July 31, 2013

 
Valuation
Technique
 Unobservable Input 
Range
(Weighted Average)
REO $13,917
 
Third party
pricing
 Cost to list/sell Loss severity 
5% – 57%(5%)
0% – 100%(48%)
Impaired mortgage loans held for investment – non TDRs $81,322
 
Collateral-
based
 
Cost to list/sell
Time to sell (months)
Collateral depreciation
Loss severity
 
0% – 134%(8%)
24(24)
(120%) – 100%(46%)
0% – 100%(59%)
Impaired mortgage loans held for investment – TDRs $45,270
 
Discounted
cash flow
 
Aged default performance
Loss severity
 
29% – 51%(39%)
0% – 21%(5%)

H&R Block Q1 FY2014 Form 10-Q(dollars in 000s)
Fair Value at
January 31, 2013		Valuation
Technique		Unobservable Input

Range

(Weighted Average)

REO

$13,852Third partyCost to list/sell5% - 50% (6%)
pricingLoss severity0% - 100% (52%)

Impaired mortgage loans held for investment – non-TDRs

$87,926Collateral- basedCost to list/sell Time to sell (months)

0% - 45% (7%)

24 (24)

Collateral depreciation(24%) - 100% (45%)
Loss severity0% - 100% (58%)

Impaired mortgage loans held for investment – TDRs

$54,282Discounted cash flowAged default performance Loss severity

30% - 50% (41%)

0% - 21% (4%)

17

Estimated Fair Value

Table of Financial Instruments

Contents


ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of our financial instruments are as follows:

                        (in 000s) 
As of  January 31, 2013        April 30, 2012 
    Carrying
Amount		   Estimated
Fair Value		   Carrying
Amount		   Estimated
Fair Value		   Fair Value
Hierarchy		 

Assets:

          

Cash and cash equivalents

  $418,385    $418,385    $1,944,334    $1,944,334     Level 1  

Cash and cash equivalents – restricted

   37,958     37,958     48,100     48,100     Level 1  

Receivables, net – short-term

   949,160     949,160     193,858     193,858     Level 1  

Mortgage loans held for investment, net

   357,887     217,019     406,201     248,535     Level 3  

Investments in available-for-sale securities

   397,313     397,313     372,352     372,352     Level 2  

Receivables, net – long-term

   158,228     158,228     127,468     127,468     Level 1 & 3  

Note receivable (including interest)

   59,213     67,048     55,444     55,444     Level 3  

Liabilities:

          

Deposits

   1,041,942     1,042,282     833,047     831,251     Level 1 & 3  

Long-term debt

   906,725     946,793     1,040,549     1,077,223     Level 3  

(in 000s) 
As of July 31, 2013 July 31, 2012 April 30, 2013
  
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

Assets:            
Cash and cash equivalents $1,163,876
 $1,163,876
 $939,871
 $939,871
 $1,747,584
 $1,747,584
Cash and cash equivalents – restricted 55,477
 55,477
 43,109
 43,109
 117,837
 117,837
Receivables, net – short–term 121,309
 124,218
 116,357
 116,357
 206,835
 206,810
Mortgage loans held for sale 7,608
 7,608
 —
 —
 —
 —
Mortgage loans held for investment, net 309,681
 194,882
 386,759
 238,658
 338,789
 210,858
Investments in AFS securities 487,033
 487,033
 381,791
 381,791
 486,876
 486,876
Receivables, net – long–term 127,855
 132,589
 128,930
 128,930
 125,048
 134,283
Note receivable (including interest) 61,561
 68,973
 56,917
 62,748
 60,352
 69,472
Liabilities:            
Deposits 759,745
 760,449
 653,681
 653,382
 938,331
 934,019
Long–term borrowings 906,632
 931,300
 1,009,634
 1,037,169
 906,680
 964,630
Contingent consideration payments 10,766
 10,766
 7,090
 7,090
 11,277
 11,277
             
Fair value estimates, methods and assumptions are set forth below. The fair value was not estimated for assets and liabilities that are not considered financial instruments.

Cash and cash equivalents, including restricted – Fair value approximates the carrying amount.

Receivables – short-term – For short-term balances, the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments.

Mortgage loans held for investment, net – The fair value of mortgage loans held for investment is determined using market pricing sources based on projected future cash flows of each individual asset, and loan characteristics including channel and performance characteristics.

Investments in available-for-sale securities – We use a third-party pricing service to determine fair value. The service’s pricing model is based on market data and utilizes available trade, bid and other market information for similar securities.

Receivables – long-term – The carrying values for the long-term portion of loans to franchisees approximate fair market value due to the variable interest rates (Level 1). Long-term EA receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates. Credit card balances bear interest at a rate similar to available market rates and have been outstanding for less than three months, therefore carrying value approximates fair market value (Level 1).

Note receivable – The fair value of the long-term note receivable from McGladrey & Pullen LLP (M&P) assumes no prepayment and is determined using market pricing sources for similar instruments based on projected future cash flows.

Deposits – The fair value of deposits with no stated maturity such as non-interest-bearing demand deposits, checking, money market and savings accounts is equal to the amount payable on demand

-16-

(Level

▪Cash and cash equivalents, including restricted - Fair value approximates the carrying amount (Level 1).
▪Receivables - short-term - For short-term balances with the exception of credit card receivables, the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments (Level 1). The fair value of credit card balances is determined using market pricing sources based on projected future cash flows of the pooled assets and performance characteristics (Level 3).
▪
Mortgage loans held for sale and mortgage loans held for investment, net - The fair value of mortgage loans is determined using market pricing sources based on projected future cash flows of each individual asset, and loan characteristics including channel and performance characteristics (Level 3).
▪Investments in available-for-sale securities - We use a third-party pricing service to determine fair value. The service's pricing model is based on market data and utilizes available trade, bid and other market information for similar securities (Level 2).
▪Receivables - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to the variable interest rates (Level 1). Long-term EA receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates. The fair value of credit card balances is determined using market pricing sources based on projected future cash flows of the pooled assets and performance characteristics (Level 3).
▪Note receivable - The fair value of the long-term note receivable from M&P assumes no prepayment and is determined using market pricing sources for similar instruments based on projected future cash flows (Level 3).
▪Deposits - The fair value of deposits with no stated maturity such as non-interest-bearing demand deposits, checking, money market and savings accounts is equal to the amount payable on demand (Level 1). The fair value of IRAs and other time deposits is estimated by discounting the future cash flows using the rates currently offered by HRB Bank for products with similar remaining maturities (Level 3).


Long-term debt – The fair value

18H&R Block Q1 FY2014 Form 10-Q
Table of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market yields on our Senior Notes.

Contents


9.Income Taxes
▪Long-term debt - The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market yields on our Senior Notes (Level 3).

▪Contingent consideration payments - Fair value approximates the carrying amount (Level 3).

NOTE 9: INCOME TAXES
We file a consolidated federal income tax return in the United States with the Internal Revenue Service (IRS) and file tax returns in various state and foreign jurisdictions. Tax returns are typically examined and settled upon completion ofat either the exam with tax controversies settledlevel or through an appeal process.

In November 2012,

Subsequent to the end of the quarter, we received written approvalnotification from the IRS Joint Committee on Taxationthat the required reviews for tax years 2008-2010 as well as the remaining refund claims relating to 1999-2007 have been approved at the required administrative levels. We anticipate an insignificant impact to tax expense as a result of the settlement, however; we expect to receive cash of a majority of the issues related to the examination of our 1999 through 2007 U.S. federal consolidated tax returns. In the third quarter, we recorded the impact of the settlement which reduced uncertain tax benefits by $59.0approximately $100 million with $33.3 million of the total resulting in an income tax benefit in the quarter. Also reducing our tax expense is a further benefit of $10.0 million primarily related to interest adjustments, bringing the total tax benefit from the settlement to $43.3 million.

Except for three issues for which we are pursuing refund claims for tax years 2002 through 2007, which will remain open until resolved, these years are closed. In addition, U.S. federal consolidated tax returns for 2008 through 2010 are currently under examination.

.

We had gross unrecognized tax benefits of $146.6$145.3 million, $208.0 million and $206.4$146.4 million at January as of July 31, 2013 and 2012 and April 30, 2012,2013, respectively. The gross unrecognized tax benefits decreased $59.8$1.1 million net in the current year, due primarily to the settlement with the IRS and increased $1.6 million during the third quarter.three months ended July 31, 2013 and 2012, respectively. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $18$33 million before JanuaryJuly 31, 2014. This2014. Approximately $15.5 million of the anticipated decrease is due primarilyto the settlement of the IRS examination of our 2008 through 2010 tax returns while the remaining decrease is due to the expiration of statutes of limitations and anticipated settlements of state audit issues. This amount is included in accrued income taxes in our consolidated balance sheet. The remaining amount is classified as long-term and is included in other noncurrent liabilities in the consolidated balance sheet.

Our effective tax rate for continuing operations was 38.6% and 37.6% for the three months ended July 31, 2013 and 2012, respectively. Due to losses in both periods, a discrete tax benefit in either period increases the tax rate while an item of discrete tax expense decreases the tax rate. During the current quarter, a net discrete tax expense of $0.2 million was recorded compared to a net discrete tax benefit of $2.7 million in the same period of the prior year. This net difference in discrete tax expense was related to differences in income tax reserves recorded of $4.4 million offset by a decrease in state interest receivable of $1.9 million. The 1.0% increase in our tax rate over the prior year was due to the change in discrete tax items which was partially offset by a decrease in the base tax rate.
NOTE 10: INTEREST INCOME AND INTEREST EXPENSE
10.
Interest Income and Expense

The following table shows the components of interest income and expenseexpense:

(in 000s) 
Three months ended July 31, 2013
 2012
Interest income:    
Mortgage loans, net $3,542
 $4,417
Loans to franchisees 2,289
 2,355
AFS securities 2,341
 1,639
Credit cards 1,228
 —
Other 1,797
 1,462
  $11,197
 $9,873
Interest expense:    
Borrowings $13,803
 $20,754
Deposits 643
 1,323
  $14,446
 $22,077
     


H&R Block Q1 FY2014 Form 10-Q19
Table of our continuing operations:

                   (in 000s) 
   Three months ended January 31,   Nine months ended January 31, 
            2013           2012           2013           2012 

Interest income:

        

Emerald Advance lines of credit

  $29,314    $30,062    $30,074    $30,297  

Mortgage loans, net

   4,120     4,948     12,705     15,760  

Loans to franchisees

   2,651     2,694     7,397     7,561  

AFS securities

   1,713     1,283     5,105     3,006  

Other

   502     489     2,751     3,113  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $38,300    $39,476    $58,032    $59,737  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Borrowings

  $17,642    $21,382    $60,391    $63,625  

Deposits

   1,786     2,011     4,504     5,275  

FHLB advances

   –     150     –     452  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $19,428    $23,543    $64,895    $69,352  
  

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

 

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11.Commitments and Contingencies

Contents


NOTE 11: COMMITMENTS AND CONTINGENCIES
Changes in deferred revenue balances related to our Peace of Mind (POM) program, the current portion of which is included in accounts payable, accrued expenses and other current liabilities and the long-term portion of which is included in other noncurrent liabilities in the consolidated balance sheets, are as follows:

        (in 000s) 
Nine months ended January 31,  2013  2012 

Balance, beginning of period

  $141,080   $140,603  

Amounts deferred for new guarantees issued

   14,202    19,471  

Revenue recognized on previous deferrals

   (57,505)   (57,254) 
  

 

 

  

 

 

 

Balance, end of period

  $97,777   $102,820  
  

 

 

  

 

 

 
   

 

 

  

 

 

 

(in 000s) 
Three months ended July 31, 2013
 2012
Balance, beginning of the period $146,286
 $141,080
Amounts deferred for new guarantees issued 737
 573
Revenue recognized on previous deferrals (27,826) (26,983)
Balance, end of the period $119,197
 $114,670
     
In addition to amounts accrued for our POM guarantee, we had accrued $14.9$15.7 million, $15.5 million and $16.3$18.0 million at January as of July 31, 2013 and 2012 and April 30, 2012,2013, respectively, related to estimated losses under our standard guarantee which is included with our in-officestandard tax preparation services. The current portion of this liability is included in accounts payable, accrued expenses and other current liabilities and the long-term portion is included in other noncurrent liabilities in the consolidated balance sheets,

sheets.

We have accrued estimated contingent consideration payments totaling $10.9$10.8 million, $7.1 million and $6.8$11.3 million as of JanuaryJuly 31, 2013 and 2012 and April 30, 2012,2013, respectively, related to recent acquisitions, with the short-term amount recorded in accounts payable, accrued expenses and deposits and the long-term portion included in other noncurrent liabilities. Estimates of contingent payments are typically based on expected financial performance of the acquired business and economic conditions at the time of acquisition. Should actual results differ materially from our assumptions, future payments made will differ from the above estimate and any differences will be recorded in our results from continuing operations.

We have contractual commitments to fund certain franchisees requesting revolving lines of credit. Our total obligation under these lines of credit was $90.0$91.5 million at JanuaryJuly 31, 2013, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $13.5 million.

$45.5 million.

We have contractual commitments to fund our credit card customers on their approved revolving lines of credit. Our total obligation under the credit card agreements was $30.5$27.4 million at JanuaryJuly 31, 2013, and net of amounts outstanding, our remaining commitment to fund totaled $7.4 million.

$3.5 million.

We maintain compensating balances related to the 2012 CLOC,with certain financial institutions that are creditors in our $1.5 billion unsecured committed line of credit governed by a Credit and Guarantee Agreement (2012 CLOC), which are not legally restricted as to withdrawal. These balances totaled $0.4$210.0 million as of JanuaryJuly 31, 2013.

2013.

We routinelymay enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Other guarantees andTypically, these indemnifications of the Company and its subsidiaries include obligations to protect counterparties from losses arising from the following: (1) tax, legal and other risks related to the purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) third-party claims relating to various arrangements in the normal course of business. Typically, there is nodo not provide a stated maximum payment related to these indemnifications,exposure and the terms of the indemnities may vary, and in many cases are limited only by the applicable statute of limitations. The likelihoodAccruals for these obligations have been established when appropriate. Historically, payments made under these types of any claims being asserted against uscontractual arrangements have not been material. See notes 12 and 13 to the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance we will ultimately prevail in the event any such claims are asserted, we believe the fair values ofconsolidated financial statements for additional discussion regarding guarantees and indemnifications relating to our continuing operations are not material as of January 31, 2013.

indemnifications.

Variable Interests

We evaluated our financial interests in variable interest entities (VIEs) as of JanuaryJuly 31, 2013 and determined that there have been no significant changes related to those financial interests.

12.Litigation and Related Contingencies

NOTE 12: LITIGATION AND RELATED CONTINGENCIES
We are a defendant in a large number of litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the

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lawsuits to which we are subject. In some of the matters, very large and/or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the


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monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement numerous claims over an extended period of time.

The outcome of a litigation matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.

In addition to litigation matters, we are also subject to other claims and regulatory investigations arising out of our business activities, including as described below.

We accrue liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been accrued for a number of the matters noted below. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range.

For such matters where a loss is believed to be reasonably possible, but not probable, or the loss cannot be reasonably estimated, no accrual has been made. It is possible that litigation and regulatory matters could require us to pay damages or make other expenditures or accrue liabilities in amounts that could not be reasonably estimated at JanuaryJuly 31, 2013.2013. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material effect on our consolidated financial position, results of operations and cash flows. As of JanuaryJuly 31, 2013 and 2012 and April 30, 2013, we accrued liabilities of $18.9$12.5 million compared, $44.4 million and $11.9 million, respectively. The decline in the balance from the prior year is primarily due to $79.0 million at April 30, 2012. In addition, there are certain SCC contingencies described below and in note 13, which relate to representation and warranty claims that may be resolved through settlement or litigation and any resulting payment charged as a reduction to the accrual for representation and warranty claims.

payments made during fiscal year 2013.

For some matters where a liability has not been accrued, we are able to estimate a reasonably possible range of loss. For those matters, and for matters where a liability has been accrued, as of JanuaryJuly 31, 2013, we estimate the aggregate range of reasonably possible losses in excess of amounts accrued to be approximately $0$0 to $119$56 million, of which approximately 78%52% relates to our discontinued operations.

For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, we review relevant information with respect to litigation and related contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.

Litigation and Other Claims, Including Indemnification Claims, Pertaining to Discontinued Mortgage Operations.LITIGATION AND OTHER CLAIMS, INCLUDING INDEMNIFICATION CLAIMS, PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – Although SCC ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008, SCC and the Company have been, remain, andor may in the future be subject to regulatory investigations, claims, including indemnification claims, and lawsuits pertaining to SCC’sSCC's mortgage business activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by regulators, third party indemnitees including depositors and underwriters, individual plaintiffs, and cases in which plaintiffs seek to represent a class of

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others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, fraud and other common law torts, rights to indemnification and violations of securities laws, the Truth in Lending Act (TILA), Equal Credit Opportunity Act and the Fair Housing Act. Given the impact of the financial crisis on the non-prime mortgage environment, the aggregate number of these investigations, claims and lawsuits has increased over time and is expected to continue to increase further.remain elevated. The amounts claimed in these investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is difficult to predict and thus in many cases cannot be reasonably estimated. In the event of unfavorable outcomes, the amounts that may be required to be paid in the discharge of liabilities or settlements could be substantial and could have a material impact on our consolidated financial position, results of operations and cash flows. Certain of these matters are described in more detail below.

On February 1, 2008, a class action lawsuit was filed in the United States District Court for the District


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Table of Massachusetts against SCC and other related entities styledCecil Barrett, et al. v. Option One Mortgage Corp., et al.(Civil Action No. 08-10157-RWZ). Plaintiffs allege discriminatory practices relating to the origination of mortgage loans in violation of the Fair Housing Act and Equal Credit Opportunity Act, and seek declaratory and injunctive relief in addition to actual and punitive damages. The court dismissed H&R Block, Inc. from the lawsuit for lack of personal jurisdiction. In March 2011, the court issued an order certifying a class, which defendants sought to appeal. On August 24, 2011, the First Circuit Court of Appeals declined to hear the appeal, noting that the district court could reconsider its certification decision in light of a recent ruling by the United States Supreme Court in an unrelated matter. SCC subsequently filed a motion to decertify the class, which the court granted. Plaintiffs’ petition for appeal was denied. A portion of our loss contingency accrual is related to this lawsuit for the amount of loss that we consider probable and reasonably estimable. We believe SCC has meritorious defenses to the claims in this case and it intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

Contents


On December 9, 2009, a putative class action lawsuit was filed in the United States District Court for the Central District of California against SCC and H&R Block, Inc. styledJeanne Drake, et al. v. Option One Mortgage Corp., et al.(Case (Case No. SACV09-1450 CJC). Plaintiffs allege breach of contract, promissory fraud, intentional interference with contractual relations, wrongful withholding of wages and unfair business practices in connection with not paying severance benefits to employees when their employment transitioned to American Home Mortgage Servicing, Inc. (now known as Homeward Residential, Inc. (Homeward)) in connection with the sale of certain assets and operations of SCC. Plaintiffs seek to recover severance benefits of approximately $8$8 million, interest and attorney’s fees, in addition to penalties and punitive damages on certain claims. On September 2, 2011, the court granted summary judgment in favor of the defendants on all claims. Plaintiffs filed an appeal, which remains pending. We have not concluded that a loss related to this matter is probable nor have we established a loss contingency related to this matter. We believe we haveSCC has meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

On October 15, 2010, the Federal Home Loan Bank (FHLB) of Chicago (FHLB-Chicago) filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styledFederal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al. against multiple defendants, including various SCC-related entities, H&R Block, Inc. and other entities, arising out of FHLB’sFHLB-Chicago’s purchase of RMBSs.residential mortgage-backed securities (RMBSs). The plaintiff seeks rescission and damages under state securities law and for common law negligent misrepresentation in connection with its purchase of two securities collateralized by loans originated and securitized by SCC. These two securities had a total initial principal amount of approximately $50$50 million, of which approximately $40$39 million remains outstanding. The plaintiff agreed to voluntarily dismiss H&R Block, Inc. from the suit. The remaining defendants, including SCC, filed motions to dismiss, which the court denied. Defendants moved for leave to appeal and the circuit court denied the motion. We have not concluded that a loss related to this matter is probable nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

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On February 22, 2012, a lawsuit was filed by SCC against Homeward in the Supreme Court of the State of New York, County of New York, styledSand Canyon Corporation v. American Home Mortgage Servicing, Inc. (Index No. 650504/2012), alleging breach of contract and breach of the implied covenant of good faith and fair dealing in connection with the Cooperation Agreement entered into with SCC in connection with SCC’s sale of its mortgage loan servicing business to the defendant in 2008. SCC is seeking relief to, among other things, require the defendant to provide loan files only by the method prescribed in applicable agreements. The court denied the defendant’sdefendant's motion to dismiss. The defendant subsequently fileddismiss and an appeal, which remains pending.appellate court affirmed. Discovery is proceeding.

On May 31, 2012, a lawsuit was filed by Homeward in the Supreme Court of the State of New York, County of New York, against SCC styledHomeward Residential, Inc. v. Sand Canyon Corporation(Index No. 651885/2012). SCC removed the case to the United States District Court for the Southern District of New York on June 28, 2012 (Case No. 1:12-cv-05067-PGG)12-cv-5067). Plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-2 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract, anticipatory breach, indemnity and declaratory judgment in connection with alleged losses incurred as a result of the breach of representations and warranties relating to loans sold to the trust and representation and warranties related to SCC. Plaintiff seeks specific performance of alleged repurchase obligations and/or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and representations given as to the loans’loans' compliance with its underwriting standards and the value of underlying real estate. SCC is seeking leavefiled a motion to dismiss. Plaintiff thereafter filed an amended complaint. SCC intends to file aan additional motion to dismiss. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

On September 28, 2012, a second lawsuit was filed by Homeward in the District Court for the Southern District of New York against SCC styledHomeward Residential, Inc. v. Sand Canyon Corporation(Case No. 12-cv-7319). Plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-3 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 96 loans sold to the trust.

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Plaintiff seeks specific performance of alleged repurchase obligations and/or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. SCC is seeking leavefiled a motion to dismiss. Plaintiff thereafter filed an amended complaint. SCC intends to file aan additional motion to dismiss. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

AsOn April 5, 2013, a third lawsuit was filed by Homeward in the District Court for the Southern District of January 31,New York against SCC. The suit, styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 13-cv-2107), was filed as a related matter to the second Homeward suit mentioned above. In this third lawsuit, Plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2007-4 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with alleged losses incurred as a result of the breach of representations and warranties relating to 159 loans sold to the trust. Plaintiff seeks specific performance of repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. SCC filed a motion to dismiss, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.
On March 29, 2013, underwritersMGRID, LLC filed a Summons with Notice against Merrill Lynch and Sand Canyon Corporation (MGRID LLC v. Merrill Lynch Mortgage Lending Inc., 651140/2013, New York State Supreme Court (Manhattan)) seeking more than $309 million in damages for alleged breaches of representations and warranties related to Merrill Lynch Mortgage Investors Trust Series 2007-HE-2. The Trust contains more than 5,000 mortgage loans of which Sand Canyon originated approximately 28% of the original principal balance of these loans. The Notice alleges that Merrill Lynch and Sand Canyon breached representations and warranties made about certain of the mortgage loans and that both have failed to repurchase loans that violated the representations and warranties. The Notice also names Citibank N.A., as trustee, for failure to bring an enforcement action against Merrill and Sand Canyon. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.
Underwriters and depositors wereare, or have been, involved in multiple lawsuits related to securitization transactions in which SCC participated. These lawsuits allege or alleged a variety of claims, including violations of federal and state securities law and common law fraud, based on alleged materially inaccurate or misleading disclosures. Based on information currently available to SCC, it believes that the 1417 lawsuits in which SCC received notice of a claim for indemnification has been made involve original investments of approximately $14 billion.$14 billion. The outstanding principal amount of these investments is approximately $4 billion. Because SCC is not party to these lawsuits (with the exception of theFederal Home Loan Bank of Chicago v. Bank of America Funding Corporationcase discussed above) and does not have control of this litigation, SCC does not have precise information about the amount of damages or other remedies being asserted or the defenses to the claims in such lawsuits. Additional lawsuits against the underwriters or depositors may be filed in the future, and SCC may receive additional notices of claims for indemnification from underwriters or depositors with respect to existing or new lawsuits. We have not concluded that a loss related to any of these indemnification claims is probable, nor have we accrued a liability related to any of these claims. We believe SCC has meritorious defenses to these indemnification claims and intends to defend them vigorously, but there can be no assurance as to their outcome or their impact on our consolidated financial position, results of operations and cash flows.

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On April 3, 2012, the Nevada Attorney General issued a subpoena to SCC indicating it was conducting an investigation concerning “the alleged commission of a practice declared to be unlawful under the Nevada Deceptive Trade Practices Act.” A majority of the documents requested in the subpoena involve SCC’s lending to minority (African American and Latino) borrowers. No complaint has been filed to date. SCC plans to continue to cooperate with the Nevada Attorney General.

Employment-Related Claims and Litigation.EMPLOYMENT-RELATED CLAIMS AND LITIGATIONWe have been named in several – On January 25, 2010, a wage and hour class action lawsuits throughoutlawsuit was filed against us in the country, includingAlice Williams v. H&R Block Enterprises LLC, Case No. RG08366506 (Superior Court of California, County of Alameda, filed January 17, 2008) (alleging improper classification and failure to compensate for all hours worked and to provide meal periods to office managers in California);Delana Ugas, et al. v. H&R Block Enterprises LLC, et al.,Case No. BC417700 (UnitedUnited States District Court Centralfor the Western District of California, filed July 13, 2009) (alleging failure to compensate tax professionals in California for all hours worked and to provide meal periods); andMissouri styled Barbara Petroski, et al. v. H&R Block Eastern Enterprises, Inc., et al.,(Case No. 10-CV-00075 (United States District Court, Western District of Missouri, filed January 25, 2010) (alleging10-00075-CV-W-DW). The plaintiffs generally allege failure to compensate tax professionals nationwide for off-season training). The plaintiffs in these lawsuitstraining that is required to be eligible for rehire the following tax season, and seek actualcompensatory damages, liquidated damages, statutory penalties, pre-judgment interest, statutory penaltiesattorneys'

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fees and attorneys’ fees.

costs. A class was certified in theWilliamscase in March 2011 (consisting of office managers who worked in company-owned offices in California from 2004 to 2011). To avoid the cost and inherent risk associated with litigation, we reached an agreement to settle the case in February 2012, subject to approval by the court. The settlement provided for a maximum payment of $7.5 million, with the actual cost of the settlement dependent on the number of valid claims submitted by class members. The court granted final approval of the settlement on November 8, 2012. An appeal was filed, but subsequently withdrawn, rendering the settlement final. We previously recorded a liability for our estimate of the expected loss under the settlement.

In theUgascase, the court initially certified a class on the claim for failure to provide meal periods (consisting of tax professionals who worked in company-owned offices in California from 2006 to 2011), but subsequently decertified the class in a ruling dated July 9, 2012. The Ninth Circuit Court of Appeals declined to hear an appeal. The court also certified a class on the claim for failure to compensate tax professionals for all hours worked (consisting of tax professionals who worked in company-owned offices in one district in California from 2006-2009). That class remains pending. A trial date has been set for October 21, 2013. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this case and intend to defend them vigorously, but there can be no assurances as to the outcome of the case or its impact on our consolidated financial position, results of operations and cash flows.

In thePetroski case, a conditional class was certified under the Fair Labor Standards Act in March 2011 (consisting of tax professionals nationwide who worked in company-owned offices and who were not compensated for certainsuch training courses occurring on or after April 15, 2007). Two classes were also certified under state laws in California and New York (consisting of tax professionals who worked in company-owned offices in those states)California and New York and who were not compensated for such training on or after March 4, 2006 and on or after March 4, 2004, respectively). We filed motionsa motion to decertify the classes, along with motionsa motion for summary judgment on all claims. On April 8, 2013, the court granted summary judgment in our favor on all claims. The plaintiffs filed an appeal, which remainremains pending. A trial date has been set for June 10, 2013. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this matter and intend to defend them vigorously, but there can be no assurances as to the outcome of the matter or its impact on our consolidated financial position, results of operations and cash flows.

RAL andAND RAC Litigation.LITIGATIONWe have been named in a putative class action styledSandra J. Basile, et al. v. H&R Block, Inc., et al., April Term 1992 Civil Action No. 3246 in the Court of Common Pleas, First Judicial District Court of Pennsylvania, Philadelphia County, instituted on April 23, 1993. The plaintiffs allege inadequate disclosures with respect to the refund anticipation loan (RAL) product and assert claims for violation of consumer protection statutes, negligent misrepresentation, breach of fiduciary duty, common law fraud, usury, and violation of the TILA. Plaintiffs seek unspecified actual and punitive damages, injunctive relief, attorneys’ fees and costs. A Pennsylvania class was certified, but later decertified by the trial court in December 2003. The intermediate appellate court subsequently reversed the decertification decision. On September 7, 2012, the Pennsylvania Supreme Court reversed the

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decision of the intermediate appellate court, thereby allowing the trial court’s decertification ruling to stand. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to this case and intend to defend the case vigorously, but there can be no assurances as to the outcome of this case or its impact on our consolidated financial position, results of operations and cash flows.

– A series of putative class action lawsuits were filed against us in various federal courts beginning on November 17, 2011 concerning the RAL and refund anticipation check (RAC)RAC products. The plaintiffs generally allege we engaged in unfair, deceptive and/or fraudulent acts in violation of various state consumer protection laws by facilitating RALs that were accompanied by allegedly inaccurate TILA disclosures, and by offering RACs without any TILA disclosures. Certain plaintiffs also allege violation of disclosure requirements of various state statutes expressly governing RALs and provisions of those statutes prohibiting tax preparers from charging or retaining certain fees. Collectively, the plaintiffs seek to represent clients who purchased RAL or RAC products in up to forty-two states and the District of Columbia during timeframes ranging from 2007 to the present. The plaintiffs seek equitable relief, disgorgement of profits, compensatory and statutory damages, restitution, civil penalties, attorneys’attorneys' fees and costs. These cases were consolidated by the Judicial Panel on Multidistrict Litigation into a single proceeding in the United States District Court for the Northern District of Illinois for coordinated pretrial proceedings, styledIN RE: H&R Block Refund Anticipation Loan Litigation(MDL No. 2373). We filed a motion to compel arbitration, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in these cases and intend to defend the cases vigorously, but there can be no assurances as to the outcome of these cases or their impact on our consolidated financial position, results of operations and cash flows.

Compliance Fee Litigation.COMPLIANCE FEE LITIGATION – On April 16, 2012, and April 19, 2012,a putative class action lawsuits werelawsuit was filed against us in the Circuit Court of Jackson County, Missouri state and federal courts, respectively,styled Manuel H. Lopez III v. H&R Block, Inc., et al. (Case # 1216CV12290) concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. These cases are styledManuel H. Lopez III v. H&R Block, Inc., et al.,The plaintiff seeks to represent all Missouri citizens who were charged the compliance fee, and asserts claims of violation of the Missouri Merchandising Practices Act, money had and received, and unjust enrichment. We filed a motion to compel arbitration of the 2011 claims. The court denied the motion. We filed an appeal, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this case and intend to defend the Circuit Courtcase vigorously, but there can be no assurances as to the outcome of Jackson County, Missouri (Case # 1216CV12290),the case or its impact on our consolidated financial position, results of operations andRonald Perras v. H&R Block, Inc., et al., cash flows.
On April 19, 2012, a putative class action lawsuit was filed against us in the United States District Court for the Western District of Missouri (Casestyled Ronald Perras v. H&R Block, Inc., et al. (Case No. 4:12-cv-00450-DGK). Taken together,concerning a compliance fee charged to retail tax clients in the plaintiffs seek2011 and 2012 tax seasons. The plaintiff seeks to represent all retail tax clientspersons nationwide (excluding citizens of Missouri) who were charged the compliance fee, and assertasserts claims of violation of various state consumer laws, money had and received, and unjust enrichment. We are seekingfiled a motion to compel arbitration of the 2011 claims, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to the outcome of the case or its impact on our consolidated financial position, results of operations and cash flows.
FORM 8863 LITIGATION -A series of putative class action lawsuits were filed against us in various federal courts and one state court beginning on March 13, 2013 (including, by way of example, Danielle Pooley v. H&R Block, Inc., No. 1:13-cv-01549-JBS-KMW (D.N.J. Mar. 13, 2013); Arthur Green and Amy Hamilton v. H&R Block, Inc., et al., No. 4:13-cv-11206 (E.D. Mich. Mar. 19, 2013); Juan Ortega v. H&R Block, Inc., et al., No. 2:13-cv-02023-MMM-RZ (C.D. Cal. Mar. 20, 2013); and Nikki R. Nevill v. H&R Block, Inc., et al., No. 1316-CV07264 (Jackson Cnty., Mo. Cir. Ct. Mar. 21, 2013)). Taken together, the plaintiffs in these actions purport to represent certain claims.clients nationwide who filed Form 8863 during tax season 2013 through an H&R Block office or using H&R Block At Home® online tax services or tax

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preparation software, and allege breach of contract, negligence and violation of state consumer laws in connection with transmission of the form. The plaintiffs seek damages, pre-judgment interest, attorneys' fees and costs. We filed motions to compel arbitration in certain of the cases, which remain pending. In July 2013, we filed a petition requesting the Judicial Panel on Multidistrict Litigation to consolidate the federal cases for coordinated pretrial proceedings. A hearing on that petition is set for September 26, 2013. In August 2013, the plaintiff in the state court action voluntarily dismissed her case without prejudice. We have not concluded that a loss related to these lawsuits is probable, nor have we accrued a liability related to either of these lawsuits. We believe we have meritorious defenses to the claims in these cases and intend to defend the cases vigorously, but there can be no assurances as to the outcome of these cases or their impact on our consolidated financial position, results of operations and cash flows.

ExpressEXPRESS IRA Litigation.LITIGATION – On January 2, 2008, the Mississippi Attorney General in the Chancery Court of Hinds County, Mississippi First Judicial District (Case No. G 2008 6 S 2) filed a lawsuit regarding our former Express IRA product that is styledJim Hood, Attorney for the State of Mississippi v. H&R Block, Inc., H&R Block Financial Advisors, Inc.,et al.The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the sale of the product in Mississippi and seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. We believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation, among other things, through an indemnification agreement. A portion of our accrual is related to these indemnity obligations.

Litigation and Claims Pertaining to the Discontinued Operations ofLITIGATION AND CLAIMS PERTAINING TO THE DISCONTINUED OPERATIONS OF RSM McGladrey.MCGLADREY – On April 17, 2009, a shareholder derivative complaint was filed by Brian Menezes, derivatively and on behalf of nominal defendant International Textile Group, Inc. against McGladrey Capital Markets LLC (MCM) in the Court of Common Pleas, Greenville County, South Carolina (C.A. No. 2009-CP-23-3346) styledBrian P. Menezes, Derivatively on Behalf of Nominal Defendant, International Textile Group, Inc. (f/k/a SafetyComponents International, Inc.) v.McGladrey Capital Markets, LLC (f/k/a RSM EquiCo Capital

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Markets, LLC), et al. Plaintiffs filed an amended complaint in October 2011 styledIn re International Textile Group Merger Litigation, adding a putative class action claim. Plaintiffs allege claims of aiding and abetting, civil conspiracy, gross negligence and breach of fiduciary duty against MCM in connection with a fairness opinion MCM provided to the Special Committee of Safety Components International, Inc. (SCI) in 2006 regarding the merger between International Textile Group, Inc. and SCI. Plaintiffs seek actual and punitive damages, pre-judgment interest, attorneys’attorneys' fees and costs. On February 8, 2012, the court dismissed plaintiffs’plaintiffs' civil conspiracy claim against all defendants. A class was certified on the remaining claims on November 20, 2012. We have not concluded that aThe court granted summary judgment in favor of MCM on June 3, 2013 on the breach of fiduciary duty claim. A trial date is set for September 9, 2013 on the remaining claims. A portion of our loss contingency accrual is related to this matter islawsuit for the amount of loss that we consider probable nor have we established a loss contingency related to this matter.and reasonably estimable. We believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

In connection with the sale of RSM McGladrey, Inc. (RSM) and MCM, we indemnified the buyers against certain litigation matters. The indemnities are not subject to a stated term or limit. A portion of our accrual is related to these indemnity obligations.

Other.OTHER – We are from time to time a party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims and lawsuits may include actions by state attorneys general, other state regulators, federal regulators, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others similarly situated. We believe we have meritorious defenses to each of these investigations, claims and lawsuits, and we are defending or intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances; however, the ultimate liability with respect to such matters is difficult to predict. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material impact on our consolidated financial position, results of operations and cash flows.

We are also a party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including, but not limited to, claims and lawsuits concerning the preparation of customers’customers' income tax returns, the fees charged customers for various productsservices and services,products, relationships with franchisees, intellectual property disputes, marketing and other competitor disputes, employment matters and contract disputes (Other

H&R Block Q1 FY2014 Form 10-Q25
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Claims). While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay in the discharge from liabilities in, or settlements of, these Other Claims will not have a material impact on our consolidated financial position, results of operations and cash flows.

13.Loss Contingencies Arising From Representations and Warranties of Our Discontinued Mortgage Operations Overview.SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. The sale of servicing assets did not include the sale of any mortgage loans.
NOTE 13:LOSS CONTINGENCIES ARISING FROM REPRESENTATIONS AND WARRANTIES OF OUR DISCONTINUED MORTGAGE OPERATIONS

SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations.
Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers or in the form of residential mortgage-backed securities (RMBSs).RMBSs. In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. These representations and warranties varied based on the nature of the transaction and the buyer’sbuyer's or insurer’sinsurer's requirements, but generally pertained to the ownership of the loan, the validity of the lien securing the loan, borrower fraud, the loan’sloan's compliance with the criteria for inclusion in the transaction, including compliance with SCC’sSCC's underwriting standards or loan criteria established by the buyer, ability to deliver required documentation, and compliance with applicable laws. Representations and warranties related to borrower fraud in whole loan sale transactions to institutional investors, which represented approximately 68% of the disposal of loans originated in calendar years 2005, 2006 and 2007, included a “knowledge qualifier” limiting SCC’sSCC's liability to those instances where SCC had knowledge of the fraud at the time the loans were sold. Representations and warranties made in other sale transactions effectively did not include a knowledge qualifier as to borrower fraud. In the event that there isSCC believes it would have an obligation to repurchase a loan or indemnify certain parties with respect to a claim for a breach of a representation and warranty andonly if such breach materially and adversely affects the value of athe mortgage loan, or a securitization insurer’sinsurer's or bondholder’scertificate holder's interest in the mortgage loan, and as discussed below, the mortgage loan has not been liquidated, SCC may be obligated to repurchasealthough there is limited and conflicting case law on the liquidated loan may be obligated to indemnify certain parties, or may enter intodefense issue. Such claims together with any settlement arrangements related to these losses are collectively referred to as “representation and warranty claims.”

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Claim History.Representation and warranty claims received by SCC have primarily related to alleged breaches of representations and warranties related to a loan’sloan's compliance with the underwriting standards established by SCC at origination and borrower fraud. Claims received since May 1, 2008 are as follows:

                                       (in millions) 
Received in Fiscal Year    2009     2010     2011     2012     2013   Total 

Loan Origination Year:

                      

2005

    $62      $15      $8      $4      $22     $   111  

2006

     217       108       194       325       133     977  

2007

     153       22       16       763       13     967  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

 

Total

    $432      $145      $218      $1,092      $168     $2,055  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

 
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

 

Note:The table above excludes amounts related to indemnity agreements.

  

Approximately 95% of claims relate tofraud for loans originated in calendar years 2006 and 2007. During calendar years 2006 and 2007, SCC originated approximately $42has received $2.1 billion in loans, of which approximately 1% were sold directly to government sponsored entities. Government sponsored entities also purchased bonds backed by SCC-originated mortgage loans and, with respect to these bonds, have the same rights as other certificate holders in private label securitizations. Due to a variety of substantive defenses and other reasons, SCC may not be subject to representation and warranty losses on loans, including without limitation loans that have been paid in full, liquidated, repurchased, or were sold without recourse.

Based on its experiences to date, SCC believes the longer a loan performs prior to an event of default, the less likely the default will be related to a breach of a representation and warranty, and the less likely that SCC will have a contractual payment obligation with respect to such loan. The majority of claims asserted since May 1, 2008, determined by SCC to represent a valid breach of its representationswhich $190 million were received in fiscal year 2013 and warranties relate to loans that became delinquent within the first two years following the origination of the mortgage loan. However, a loan that defaults within the first two years following the origination of the mortgage loan does not necessarily default due to a breach of a representation and warranty. Exclusive of loans that have been paid$1.1 billion in full, repurchased or sold without recourse, loans originated in 2006 and 2007 that defaulted in the first two years totaled $6.1 billion and $2.7 billion, respectively.

fiscal year 2012. SCC received $168new claims totaling $68.6 million in claims during the ninethree months ended JanuaryJuly 31, 2013 most, the majority of which were asserted by a private-label securitization trustee or servicer on behalf of certificate holders ($144 million),received from parties with the remainder asserted by monoline insurers ($15 million) and Fannie Mae ($9 million). During the fiscal year ended April 30, 2012, SCC received claims totaling $1.1 billion. The amount of claims received varies from period to period, and these variances have been and could continue to fluctuate substantially.

During fiscal year 2013,whom SCC has either entered into, or is in discussions with several parties fortolling agreements. These tolling agreements to extendtoll the running of any applicable statute of limitations related to potential lawsuits regarding representation and warranty claims and other claims against SCC involving substantial amounts. SCC. Claims totaling approximately $71.7 million remained subject to review as of July 31, 2013, of which, approximately $1.9 million represent a reassertion of previously denied claims.

SETTLEMENT ACTIONS -SCC has experiencedentered into tolling agreements with the counterparties that initiated a recent declinesignificant majority of the asserted claims received by SCC. Beginning in the fourth quarter of fiscal year 2013 and continuing into the first quarter of fiscal year 2014, SCC has been engaged in discussions with these counterparties regarding the bulk settlement of previously denied and potential future claims. Based on settlement discussions with these counterparties, SCC believes a bulk settlement approach, rather than the loan-by-loan resolution process, will be needed to resolve all of the representation and warranty and other claims that are the subject of these discussions. In the event that current efforts to settle are not successful, SCC believes claim volumes may increase or litigation may result.
SCC continues to engage in a loan-by-loan review of new requests for repurchase. SCC has and will continue to vigorously contest any request for repurchase when it has concluded that a valid basis for repurchase does not exist. SCC's decision whether to engage in bulk settlement discussions is based on factors that vary by counterparty or type of counterparty and include the considerations used by SCC in determining its loss estimate, described below under "Liability for Estimated Contingent Losses."
LIABILITY FOR ESTIMATED CONTINGENT LOSSES -SCC records a liability for losses related to representation and warranty claims which it believeswhen those losses are believed to be both probable and reasonably estimable. Development of loss estimates is subjective, subject to a high degree of management judgment, and estimates may be partially attributablevary significantly period to period. SCC's loss estimate as of July 31, 2013 considers the existenceexperience gained through discussions with counterparties, and an assessment of, these tolling agreements, and this may continue until the tolling agreements are terminated.

Liability for Estimated Contingent Losses.SCC estimates probable losses arising from representations and warranties on loans it originated by assessing, among other things, historical claim activity, both known and projected. Projections of futureresults, threatened claims, are based on an analysis that includes a review of the terms and


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provisions of related agreements, counterparty willingness to pursue a settlement, legal standing of counterparties to provide a comprehensive settlement, the historical claim and validity rate experience and inquiries from various third-parties. SCC’s methodology for calculating this liability also includes an assessmentpotential pro-rata realization of the probability that individual counterparties (private label securitization trustees on behalf of certificate holders, monoline insurersclaims as compared to all similar claims and whole-loan purchasers) will assert future claims. SCC also considers the potential for bulk settlementsother relevant facts and circumstances when determiningdeveloping its estimated accrual for probable losses related to representations and warranties.

SCC has accrued a liability as of January 31, 2013 for estimated contingent losses arising from representations and warranties on loans it originated of $118.8 million, which represents SCC’s estimate of the probable loss that may occur. While SCC uses what it believes to beloss. The estimate is based on the best information currently available, to itsignificant management judgment, and a number of factors, including developments in estimating its liability, assessing the likelihood that claims will be asserted in the future and estimating

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probable losses are inherently subjective and require considerable management judgment. To the extent that the volume of claims, the level of claims (including whether the loan has been liquidated), the level of disputed claims, the level of threatened claims, the counterparties asserting claims, the nature and severity of claims, the outcome of various litigation related to claims, or the value of residential home prices, among other factors, differ in the future from current estimates, future losses may differ from the current estimatescase law and those differences may be significant. Becausefactors mentioned above, that are subject to change. Changes in any one of these numerous uncertainties, SCCfactors could significantly impact the estimate.

The liability is not able to estimate reasonably possible loss outcomesincluded in excess of itsaccounts payable, accrued expenses and other current accrual. However, such possible loss outcomes may be significant. A 1% increase in loss severities and a 1% decrease in assumed denial rates would result in losses beyond SCC’s accrual of approximately $27 million. This sensitivity is hypothetical and is intended to provide an indication ofliabilities on the impact of a change in key assumptions on this loss contingency. In reality, changes in one assumption may result in changes in other assumptions, which could affect the sensitivity and the amount of losses.

consolidated balance sheets. A rollforward of SCC’sSCC's accrued liability for these loss contingencies is as follows:

        (in 000s) 
Nine months ended January 31,  2013  2012 

Balance at beginning of period

  $130,018   $126,260  

Provisions

   –   20,000  

Payments

   (11,253)   (3,337) 
  

 

 

  

 

 

 

Balance at end of period

  $118,765   $142,923  
  

 

 

  

 

 

 
   

 

 

  

 

 

 

The recent federal court decision styledMASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgages (Case No. 11-CV-2542 (JRT/TNL), 2012 WL 4511065 (D. Minn.), the “WMC Decision”), decided on October 1, 2012, recognizes the liquidation of a mortgage loan in a foreclosure sale as a defense to representation and warranty claims and related litigation. Specifically, the court noted that under the law of many states, including New York (which was applicable in the case at hand and governs most of SCC’s purchase agreements for mortgage loans), a foreclosure decree operates to merge the interest of the mortgagor and mortgagee and, consequently, foreclosure on the properties securing the mortgage loan extinguishes it and renders it unavailable for repurchase. Consistent with this approach,

(in 000s) 
Three months ended July 31, 2013
 2012
Balance, beginning of the period $158,765
 $130,018
Provisions —
 —
Payments —
 (753)
Balance, end of the period $158,765
 $129,265
     
SCC is taking the legal position, where appropriate, for both contractual representation and warranty claims and similar claims in litigation, that a valid representation and warranty claim cannot be made with respect to a mortgage loan that has been liquidated. However, the WMC DecisionThere is limited and conflicting case law on this issue. These decisions are from lower courts, are inconsistent in their analysis and receptivity to this defense, and are subject to appeal and itappeal. It is anticipated that the liquidated mortgage loan defense will be the subject of future judicial decisions. Until the validity of the liquidated mortgage loan defense is further validated inclarified by the courts or other developments occur, SCC’sSCC's estimated accrual for representation and warranty claims will continue to be determined using its prior methodology, which does not take this defense into account.
ESTIMATED RANGE OF POSSIBLE LOSS

Settlement Actions.-SCC has vigorously contested any request for repurchase whenbelieves it has concludedis reasonably possible that a valid basis for repurchase does not exist and will continue to do so in the future.

American International Group, Inc. (AIG) had threatened to assert claims of various types in the approximate amount of $650 million in connection with the sale and securitization of SCC-originated mortgage loans. On December 21, 2012, SCC and AIG entered into an agreement to resolve all of AIG’s claims, except that AIG retained the right to benefit from payments forfuture representation and warranty claims by third parties, without AIG’s assistance or encouragement,losses may vary from amounts recorded for these exposures. SCC currently estimates that the range of reasonably possible loss could be up to $30 million in excess of amounts accrued. This estimated range is based on currently available information, significant judgment and a number of assumptions that are madesubject to securitization trusts in which AIG has a continuing interest.

SCCchange. The actual loss that may enter into other bulk settlements it believes to be advantageous in lieuincurred could be more or less than our accrual or the estimate of a loan-by-loan review process. In addition, there are certain SCC contingenciesreasonably possible losses.    

INDEMNIFICATION OBLIGATIONS -As described more fully in note 12, that include representation and warranty claims that may be resolved through settlement or litigation. Any resulting payment from such settlements would be charged as a reduction to the accrual for representation and warranty claims.

Indemnification obligations.Losseslosses may also be incurred with respect to various indemnification claims related to loansby underwriters and securitiesdepositors in securitization transactions in which SCC originated and sold.participated. Losses from these indemnification obligations can be significant andclaims are frequently not subject to a stated term or limit. SCC believes itWe have not concluded that a loss related to any of these indemnification claims is not probable that it will be required to perform under its indemnification obligations;probable; however, there can be no assurances as to the outcome or impact of these indemnification claims on our consolidated financial position, results of operations and cash flows related to claimsflows. The accrued liability described above totaling $158.8 million does not include accrued losses, if any, which may arise from thosethese indemnification obligations.claims.

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H&R Block Q1 FY2014 Form 10-Q27

Reviewed Claims.Since May 2008, SCC has denied approximately 94%

Table of all claims reviewed, excluding loans covered by other settlements. Of the denied claims, 1% related to loans that have been paid in full and 1% of claims were denied because they related to loans which have been liquidated. Paid claim loss severity rates have approximated 64% and SCC has not observed any material trends related to average losses. Repurchased loans are considered held for sale and are included in prepaid expenses and other current assets on the consolidated balance sheets.

SCC generally has 60 to 120 days to respond to a claimed breach of a representation and warranty and performs a loan-by-loan review of all claims during this time. Counterparties are able to reassert claims that SCC has denied. Claims totaling approximately $42 million remained subject to review as of January 31, 2013, of which, approximately $20 million represent a reassertion of previously denied claims.

14.Contents
NOTE 14: DISCONTINUED OPERATIONS
Discontinued Operations

Our discontinued operations consist of our former Business Services segment and SCC. We sold RSM and MCMor ceased to operate all businesses within our former Business Services segment in fiscal year 2012. SCC exited its mortgage business in fiscal year 2008.

The results of operations

Results of our discontinued operations are as follows:

                (in 000s) 
   Three months
ended January 31,		  Nine months ended
January 31,		 
    2013  2012  2013  2012 

Revenues

  $–   $50,508   $–   $416,436  
  

 

 

  

 

 

  

 

 

  

 

 

 

Pretax income (loss) from operations:

     

RSM and related businesses

  $(511)  $1,117   $(204)  $18,831  

Mortgage

   (765)   (27,385)   (10,639)   (54,019) 
  

 

 

  

 

 

  

 

 

  

 

 

 
   (1,276)   (26,268)   (10,843)   (35,188) 

Income tax benefit

   (483)   (6,462)   (4,215)   (10,268) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss from operations

   (793)   (19,806)   (6,628)   (24,920) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Pretax loss on sales of businesses

   –    (236)   –    (109,485) 

Income tax benefit

   –    (20,260)   –    (59,969) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net gain (loss) on sales of businesses

   –    20,024    –    (49,516) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) from discontinued operations

  $(793)  $218   $(6,628)  $(74,436) 
  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

 

15.Regulatory Requirements – HRB Bank

(in 000s) 
Three months ended July 31, 2013
 2012
Revenues $—
 $—
Pretax income (loss) from operations:    
RSM and related businesses $(1,228) $528
Mortgage (1,898) (3,463)
  (3,126) (2,935)
Income tax benefit (1,209) (1,144)
Net loss from discontinued operations $(1,917) $(1,791)
     
NOTE 15: REGULATORY CAPITAL REQUIREMENTS
The following table sets forth HRB Bank’sBank's regulatory capital requirements calculated in its Call Report, as filed with the Federal Financial Institutions Examination Council (FFIEC):

                      (dollars in 000s) 
    Actual  Minimum Capital
Requirement		  Minimum to be
Well Capitalized		 
    Amount   Ratio  Amount   Ratio  Amount   Ratio 

As of December 31, 2012:

          

Total risk-based capital ratio(1)

  $469,979     61.9%  $60,747     8.0%  $75,934     10.0% 

Tier 1 risk-based capital ratio(2)

   460,341     60.6%   N/A     N/A    45,561     6.0% 

Tier 1 capital ratio (leverage)(3)

   460,341     29.7%   62,041     4.0%(5)   77,551     5.0% 

Tangible equity ratio(4)

   460,341     29.7%   23,265     1.5%   N/A     N/A  

As of March 31, 2012:

          

Total risk-based capital ratio(1)

  $458,860     120.3%  $30,513     8.0%  $38,141     10.0% 

Tier 1 risk-based capital ratio(2)

   453,800     119.0%   N/A     N/A    22,885     6.0% 

Tier 1 capital ratio (leverage)(3)

   453,800     29.4%   185,252     12.0%   77,188     5.0% 

Tangible equity ratio(4)

   453,800     29.4%   23,157     1.5%   N/A     N/A  

(1)      Total risk-based capital divided by risk-weighted assets.

(2)      Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets.

(3)      Tier 1 (core) capital divided by adjusted total assets.

(4)      Tangible capital divided by tangible assets.

(5)      Effective April 5, 2012, the minimum capital requirement was changed to 4% by the OCC, although HRB Bank plans to maintain a minimum of 12.0% leverage capital at the end of each calendar quarter.

         

         

          

          

           

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(dollars in 000s) 
  Actual 
Minimum
Capital Requirement
  
Minimum to be
Well Capitalized
  Amount Ratio Amount Ratio  Amount Ratio
As of June 30, 2013:             
Total risk-based capital ratio (1)
 $508,667
 132.5% $30,701
 8.0%  $38,376
 10.0%
Tier 1 risk-based capital ratio (2)
 503,536
 131.2% N/A
 N/A
  23,026
 6.0%
Tier 1 capital ratio (leverage) (3)
 503,536
 36.9% 163,620
 12.0%
(5) 
 68,175
 5.0%
Tangible equity ratio (4)
 503,536
 36.9% 20,453
 1.5%  N/A
 N/A
As of June 30, 2012:             
Total risk-based capital ratio (1)
 $461,856
 123.8% $29,856
 8.0%  $37,321
 10.0%
Tier 1 risk-based capital ratio (2)
 456,945
 122.4% N/A
 N/A
  22,392
 6.0%
Tier 1 capital ratio (leverage) (3)
 456,945
 38.7% 47,227
 12.0%
(5) 
 59,034
 5.0%
Tangible equity ratio (4)
 456,945
 38.7% 17,710
 1.5%  N/A
 N/A
As of March 31, 2013:             
Total risk-based capital ratio (1)
 $506,734
 131.6% $30,806
 8.0%  $38,508
 10.0%
Tier 1 risk-based capital ratio (2)
 501,731
 130.3% N/A
 N/A
  23,105
 6.0%
Tier 1 capital ratio (leverage) (3)
 501,731
 25.5% 236,315
 12.0%
(5) 
 98,464
 5.0%
Tangible equity ratio (4)
 501,731
 25.5% 29,539
 1.5%  N/A
 N/A
(1)
Total risk-based capital divided by risk-weighted assets.
(2)
Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets.
(3)
Tier 1 (core) capital divided by adjusted total assets.
(4)
Tangible capital divided by tangible assets.
(5)
Effective April 5, 2012, the minimum capital requirement was changed to 4% by the OCC, although HRB Bank plans to maintain a minimum of 12.0% leverage capital at the end of each calendar quarter.
Quantitative measures established by regulation to ensure capital adequacy require HRB Bank to maintain minimum amounts and ratios of tangible equity, total risk-based capital and Tier 1 capital, as set forth in the table above. As of JanuaryJuly 31, 2013, HRB Bank’s leverage ratio was 30.4%38.2%.



16.
Segment Information
28H&R Block Q1 FY2014 Form 10-Q

Table of Contents

NOTE 16: SEGMENT INFORMATION
Results of our continuing operations by reportable operating segment are as follows:

                (in 000s) 
   Three months ended
January 31,		  Nine months ended
January 31,		 
    2013  2012  2013  2012 

Revenues:

     

Tax Services

  $464,634   $655,701   $684,706   $868,144  

Corporate and eliminations

   7,345    7,579    21,025    24,953  
  

 

 

  

 

 

  

 

 

  

 

 

 
  $471,979   $663,280   $705,731   $893,097  
  

 

 

  

 

 

  

 

 

  

 

 

 

Pretax income (loss):

     

Tax Services

  $(64,189)  $31,716   $(335,203)  $(311,733) 

Corporate and eliminations

   (32,079)   (32,742)   (92,622)   (93,823) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before tax benefit

  $(96,268)  $(1,026)  $(427,825)  $(405,556) 
  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

 

17.New Accounting Standards

In September 2011, the FASB issued Accounting Standards Update 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” Under the amendments in this guidance, an entity may consider qualitative factors before applying Step 1 of the goodwill impairment assessment, but may no longer be permitted to carry forward estimates of a reporting unit’s fair value from a prior year when specific criteria are met. These amendments were effective for us as the beginning of our current fiscal year. We adopted this guidance as of May 1, 2012, and this new guidance did not have a material effect on our consolidated financial statements.

18.Condensed Consolidating Financial Statements

(in 000s) 
Three months ended July 31, 2013
 2012
REVENUES :    
Tax Services $121,691
 $90,253
Corporate and eliminations 5,504
 6,236
  $127,195
 $96,489
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES :    
Tax Services $(144,394) $(140,905)
Corporate and eliminations (40,100) (28,364)
  $(184,494) $(169,269)
  

 

NOTE 17: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Block Financial LLC (Block Financial) is an indirect, wholly-owned100% owned subsidiary of the Company. Block Financial is the Issuer and the Company is the full and unconditional Guarantor of the Senior Notes issued on October 25, 2012 and October 26, 2004, our 2012 CLOC, and other indebtedness issued from time to time. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions.

-28-

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (in 000s)
Three months ended July 31, 2013 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 Eliminations
 
Consolidated
H&R Block

Total revenues $—
 $27,215
 $100,136
 $(156) $127,195
Cost of revenues —
 39,359
 170,850
 (156) 210,053
Selling, general and administrative —
 14,038
 82,659
 —
 96,697
Total expenses —
 53,397
 253,509
 (156) 306,750
Operating loss —
 (26,182) (153,373) —
 (179,555)
Other income (expense), net (184,494) 44
 (4,983) 184,494
 (4,939)
Loss from continuing operations before tax benefit (184,494) (26,138) (158,356) 184,494
 (184,494)
Income tax benefit (71,224) (9,398) (61,826) 71,224
 (71,224)
Net loss from continuing operations (113,270) (16,740) (96,530) 113,270
 (113,270)
Net loss from discontinued operations (1,917) (1,163) (754) 1,917
 (1,917)
Net loss (115,187) (17,903) (97,284) 115,187
 (115,187)
Other comprehensive loss (10,807) (7,724) (3,083) 10,807
 (10,807)
Comprehensive loss $(125,994) $(25,627) $(100,367) $125,994
 $(125,994)
           

H&R Block Q1 FY2014 Form 10-Q29
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)  (in 000s) 
Three months ended
January 31, 2013		  H&R Block, Inc.
(Guarantor)		  Block Financial
(Issuer)		  Other
Subsidiaries		  Eliminations  

Consolidated

H&R Block

 

Total revenues

  $–   $58,616   $414,858   $(1,495)  $471,979  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost of revenues

   –    68,333    310,776    (1,491)   377,618  

Selling, general and administrative

   –    11,327    175,674    (4)   186,997  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   –    79,660    486,450    (1,495)   564,615  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating loss

   –    (21,044)   (71,592)   –    (92,636) 

Other income (expense), net

   (96,268)   (4,938)   1,306    96,268    (3,632) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before tax benefit

   (96,268)   (25,982)   (70,286)   96,268    (96,268) 

Income tax benefit

   (79,353)   (31,416)   (47,937)   79,353    (79,353) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) from continuing operations

   (16,915)   5,434    (22,349)   16,915    (16,915) 

Net loss from discontinued operations

   (793)   (483)   (310)   793    (793) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

   (17,708)   4,951    (22,659)   17,708    (17,708) 

Other comprehensive income (loss)

   370    (569)   939    (370)   370  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $(17,338)  $4,382   $(21,720)  $17,338   $(17,338) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Three months ended
January 31, 2012		  H&R Block, Inc.
(Guarantor)		  Block Financial
(Issuer)		  Other
Subsidiaries		  Eliminations  Consolidated
H&R Block		 

Total revenues

  $–   $65,604   $597,837   $(161)  $663,280  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost of revenues

   –    77,965    377,436    (161)   455,240  

Selling, general and administrative

   –    9,705    202,031    –    211,736  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   –    87,670    579,467    (161)   666,976  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income (loss)

   –    (22,066)   18,370    –    (3,696) 

Other income (expense), net

   (1,026)   1,301    1,369    1,026    2,670  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations before tax (benefit)

   (1,026)   (20,765)   19,739    1,026    (1,026) 

Income tax (benefit)

   2,541    12,036    (9,495)   (2,541)   2,541  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) from continuing operations

   (3,567)   (32,801)   29,234    3,567    (3,567) 

Net income (loss) from discontinued operations

   218    (15,695)   15,913    (218)   218  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

   (3,349)   (48,496)   45,147    3,349    (3,349) 

Other comprehensive income (loss)

   3,050    (335)   3,385    (3,050)   3,050  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $(299)  $(48,831)  $48,532   $299   $(299) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

-29-

Table of Contents

Three months ended July 31, 2012 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 Eliminations
 
Consolidated
H&R Block

Total revenues $—
 $21,929
 $74,616
 $(56) $96,489
Cost of revenues —
 34,942
 158,538
 (56) 193,424
Selling, general and administrative —
 7,640
 67,838
 —
 75,478
Total expenses —
 42,582
 226,376
 (56) 268,902
Operating loss —
 (20,653) (151,760) —
 (172,413)
Other income (expense), net (169,269) 1,324
 1,820
 169,269
 3,144
Loss from continuing operations before tax benefit (169,269) (19,329) (149,940) 169,269
 (169,269)
Income tax benefit (63,619) (8,255) (55,364) 63,619
 (63,619)
Net loss from continuing operations (105,650) (11,074) (94,576) 105,650
 (105,650)
Net income (loss) from discontinued operations (1,791) (2,111) 320
 1,791
 (1,791)
Net loss (107,441) (13,185) (94,256) 107,441
 (107,441)
Other comprehensive income (loss) (4,795) 135
 (4,930) 4,795
 (4,795)
Comprehensive loss $(112,236) $(13,050) $(99,186) $112,236
 $(112,236)
           

CONDENSED CONSOLIDATING BALANCE SHEETS (in 000s)
As of July 31, 2013 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 Eliminations
 
Consolidated
H&R Block

Cash & cash equivalents $—
 $439,100
 $728,246
 $(3,470) $1,163,876
Cash & cash equivalents — restricted —
 12,290
 43,187
 —
 55,477
Receivables, net 460
 94,932
 25,917
 —
 121,309
Mortgage loans held for investment, net —
 309,681
 —
 —
 309,681
Intangible assets and goodwill, net —
 —
 716,122
 —
 716,122
Investments in subsidiaries 3,274,648
 330
 1,564
 (3,274,648) 1,894
Amounts due from affiliates —
 409,794
 2,176,279
 (2,586,073) —
Other assets 6,976
 651,998
 735,555
 —
 1,394,529
Total assets $3,282,084
 $1,918,125
 $4,426,870
 $(5,864,191) $3,762,888
           
Customer deposits $—
 $761,399
 $—
 $(3,470) $757,929
Long-term debt —
 897,107
 9,525
 —
 906,632
Other liabilities 490
 238,678
 753,844
 —
 993,012
Amounts due to affiliates 2,176,279
 —
 409,794
 (2,586,073) —
Stockholders’ equity 1,105,315
 20,941
 3,253,707
 (3,274,648) 1,105,315
Total liabilities and stockholders’ equity $3,282,084
 $1,918,125
 $4,426,870
 $(5,864,191) $3,762,888
           

30H&R Block Q1 FY2014 Form 10-Q

Nine months ended

January 31, 2013

  H&R Block, Inc.
(Guarantor)		  Block Financial
(Issuer)		  Other
Subsidiaries		  Eliminations  

Consolidated

H&R Block

 

Total revenues

  $–   $98,531   $608,773   $(1,573)  $705,731  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost of revenues

   –   137,146    647,476    (1,569)   783,053  

Selling, general and administrative

   –   26,288    326,518    (4)   352,802  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   –   163,434    973,994    (1,573)   1,135,855  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating loss

   –   (64,903)   (365,221)   –   (430,124) 

Other income (expense), net

   (427,825)   (2,428)   4,727    427,825    2,299  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before tax benefit

   (427,825)   (67,331)   (360,494)   427,825    (427,825) 

Income tax benefit

   (204,061)   (46,374)   (157,687)   204,061    (204,061) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss from continuing operations

   (223,764)   (20,957)   (202,807)   223,764    (223,764) 

Net loss from discontinued operations

   (6,628)   (6,503)   (125)   6,628    (6,628) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

   (230,392)   (27,460)   (202,932)   230,392    (230,392) 

Other comprehensive loss

   (3,090)   (315)   (2,775)   3,090    (3,090) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive loss

  $(233,482)  $(27,775)  $(205,707)  $233,482   $(233,482) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Nine months ended

January 31, 2012

  H&R Block, Inc.
(Guarantor)		  Block Financial
(Issuer)		  Other
Subsidiaries		  Eliminations  Consolidated
H&R Block		 

Total revenues

  $–   $104,937   $788,321   $(161)  $893,097  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost of revenues

   –   152,605    742,993    (161)   895,437  

Selling, general and administrative

   –   24,044    388,357    –   412,401  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   –   176,649    1,131,350    (161)   1,307,838  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating loss

   –   (71,712)   (343,029)   –   (414,741) 

Other income (expense), net

   (405,556)   7,647    1,538    405,556    9,185  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before tax benefit

   (405,556)   (64,065)   (341,491)   405,556    (405,556) 

Income tax benefit

   (159,821)   (4,877)   (154,944)   159,821    (159,821) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss from continuing operations

   (245,735)   (59,188)   (186,547)   245,735    (245,735) 

Net loss from discontinued operations

   (74,436)   (36,398)   (38,038)   74,436    (74,436) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

   (320,171)   (95,586)   (224,585)   320,171    (320,171) 

Other comprehensive income (loss)

   (3,824)   1,430    (5,254)   3,824    (3,824) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive loss

  $(323,995)  $(94,156)  $(229,839)  $323,995   $(323,995) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

-30-

Table of Contents

As of July 31, 2012 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 Eliminations
 
Consolidated
H&R Block

Cash & cash equivalents $—
 $342,859
 $598,336
 $(1,324) $939,871
Cash & cash equivalents — restricted —
 859
 42,250
 —
 43,109
Receivables, net —
 91,335
 25,022
 —
 116,357
Mortgage loans held for investment, net —
 386,759
 —
 —
 386,759
Intangible assets and goodwill, net —
 —
 702,634
 —
 702,634
Investments in subsidiaries 957,349
 —
 641
 (957,349) 641
Amounts due from affiliates (1)
 110
 —
 225,104
 (225,214) —
Other assets 7,734
 940,226
 456,946
 —
 1,404,906
Total assets $965,193
 $1,762,038
 $2,050,933
 $(1,183,887) $3,594,277
           
Customer deposits $—
 $649,702
 $—
 $(1,324) $648,378
Long-term debt —
 999,415
 10,219
 —
 1,009,634
Other liabilities 248
 232,997
 857,347
 —
 1,090,592
Amounts due to affiliates (1)
 119,272
 105,832
 110
 (225,214) —
Stockholders’ equity 845,673
 (225,908) 1,183,257
 (957,349) 845,673
Total liabilities and stockholders’ equity $965,193
 $1,762,038
 $2,050,933
 $(1,183,887) $3,594,277
           
(1)
Amounts have been restated to conform to the current period presentation, including the presentation of income tax receivables settled with affiliates and the presentation of intercompany receivables and payables gross, rather than net.
As of April 30, 2013 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 Eliminations
 
Consolidated
H&R Block

Cash & cash equivalents $—
 $558,110
 $1,192,197
 $(2,723) $1,747,584
Cash & cash equivalents — restricted —
 75,096
 42,741
 —
 117,837
Receivables, net 769
 99,844
 106,222
 —
 206,835
Mortgage loans held for investment, net —
 338,789
 —
 —
 338,789
Intangible assets and goodwill, net —
 —
 719,221
 —
 719,221
Investments in subsidiaries 3,444,442
 473
 —
 (3,444,442) 473
Amounts due from affiliates —
 410,590
 2,189,625
 (2,600,215) —
Other assets 8,390
 645,166
 753,484
 —
 1,407,040
Total assets $3,453,601
 $2,128,068
 $5,003,490
 $(6,047,380) $4,537,779
           
Customer deposits $—
 $939,187
 $—
 $(2,723) $936,464
Long-term debt —
 896,978
 9,702
 —
 906,680
Other liabilities 429
 245,862
 1,184,797
 —
 1,431,088
Amounts due to affiliates 2,189,625
 —
 410,590
 (2,600,215) —
Stockholders’ equity 1,263,547
 46,041
 3,398,401
 (3,444,442) 1,263,547
Total liabilities and stockholders’ equity $3,453,601
 $2,128,068
 $5,003,490
 $(6,047,380) $4,537,779
           


H&R Block Q1 FY2014 Form 10-Q31
Condensed Consolidating Balance Sheets       (in 000s) 
As of January 31, 2013  

H&R Block, Inc.

(Guarantor)

   

Block Financial

(Issuer)

  

Other

Subsidiaries

   Eliminations  

Consolidated

H&R Block

 

Cash & cash equivalents

  $–    $294,816   $124,102    $(533)  $418,385  

Cash & cash equivalents – restricted

   –     1,613    36,345     –    37,958  

Receivables, net

   963     555,418    392,779     –    949,160  

Mortgage loans held for investment

   –     357,887    –     –    357,887  

Intangible assets and goodwill, net

   –     –    706,779     –    706,779  

Investments in subsidiaries

   2,834,612     556    –     (2,834,612)   556  

Amounts due from affiliates

   62     496,760    2,208,626     (2,705,448)   –  

Other assets

   8,244     630,999    822,528     –    1,461,771  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total assets

  $2,843,881    $2,338,049   $4,291,159    $(5,540,593)  $3,932,496  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Customer deposits

  $–    $1,037,501   $–    $(533)  $1,036,968  

Commercial paper borrowings

   –     424,967    –     –    424,967  

Long-term debt

   –     896,848    9,877     –    906,725  

Other liabilities

   367     251,833    676,748     –    928,948  

Amounts due to affiliates

   2,208,626     -    496,822     (2,705,448)   –  

Stockholders’ equity

   634,888     (273,100)   3,107,712     (2,834,612)   634,888  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $2,843,881    $2,338,049   $4,291,159    $(5,540,593)  $3,932,496  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

As of January 31, 2013  

H&R Block, Inc.

(Guarantor)

   

Block Financial

(Issuer)

  

Other

Subsidiaries

   Eliminations  

Consolidated

H&R Block

 

Cash & cash equivalents

  $–    $515,147   $1,430,030    $(843)  $1,944,334  

Cash & cash equivalents – restricted

   –     8,814    39,286     –    48,100  

Receivables, net

   –     90,755    103,103     –    193,858  

Mortgage loans held for investment, net

   –     406,201    –     –    406,201  

Intangible assets and goodwill, net

   –     –    692,017     –    692,017  

Investments in subsidiaries

   2,525,473     –    715     (2,525,473)   715  

Amounts due from affiliates(1)

   188     492,851    1,430,782     (1,923,821)   –  

Other assets

   8,887     623,032    732,423     –    1,364,342  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total assets(1)

  $2,534,548    $2,136,800   $4,428,356    $(4,450,137)  $4,649,567  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Customer deposits

  $–    $828,392   $–    $(843)  $827,549  

Long-term debt

   –     999,325    41,224     –    1,040,549  

Other liabilities(1)

   22,690     277,160    1,155,727     –    1,455,577  

Amounts due to affiliates(1)

   1,185,966     244,816    493,039     (1,923,821)   –  

Stockholders’ equity

   1,325,892     (212,893)   2,738,366     (2,525,473)   1,325,892  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total liabilities and stockholders’ equity(1)

  $2,534,548    $2,136,800   $4,428,356    $(4,450,137)  $4,649,567  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
                        

(1)     Amounts as of April 30, 2012 have been restated to conform to the current period presentation, including the presentation of income tax receivables settled with affiliates and the presentation of intercompany receivables and payables gross, rather than net.

         

-31-

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (in 000s)
Three months ended July 31, 2013 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 Eliminations
 
Consolidated
H&R Block

Net cash provided by (used in) operating activities: $1,784
 $53,801
 $(374,327) $—
 $(318,742)
Cash flows from investing:          
Purchases of AFS securities —
 (45,158) —
 —
 (45,158)
Maturities and payments received on AFS securities —
 32,061
 —
 —
 32,061
Mortgage loans held for investment, net —
 11,707
 —
 —
 11,707
Purchases of property & equipment —
 —
 (34,386) —
 (34,386)
Loans made to franchisees —
 (6,657) —
 —
 (6,657)
Repayments from franchisees —
 7,164
 —
 —
 7,164
Intercompany advances (payments) 35,014
 —
 —
 (35,014) —
Other, net —
 5,501
 678
 —
 6,179
Net cash provided by (used in) investing activities 35,014
 4,618
 (33,708) (35,014) (29,090)
Cash flows from financing:          
Customer banking deposits, net —
 (178,617) —
 (747) (179,364)
Dividends paid (54,550) —
 —
 —
 (54,550)
Repurchase of common stock (4,201) —
 —
 —
 (4,201)
Proceeds from stock options 21,953
 —
 —
 —
 21,953
Intercompany advances (payments) —
 1,188
 (36,202) 35,014
 —
Other, net —
 —
 (13,093) —
 (13,093)
Net cash used in financing activities (36,798) (177,429) (49,295) 34,267
 (229,255)
Effects of exchange rates on cash —
 —
 (6,621) —
 (6,621)
Net decrease in cash —
 (119,010) (463,951) (747) (583,708)
Cash – beginning of the period —
 558,110
 1,192,197
 (2,723) 1,747,584
Cash – end of the period $—
 $439,100
 $728,246
 $(3,470) $1,163,876
           

32H&R Block Q1 FY2014 Form 10-Q
Condensed Consolidating Statements of Cash Flows      (in 000s) 
Nine months ended
January 31, 2013		  H&R Block, Inc.
(Guarantor)		  Block Financial
(Issuer)		  Other
Subsidiaries		  Eliminations  Consolidated
H&R Block		 

Net cash provided by (used in)
operating activities:

  $(158)  $(408,904)  $(902,864)   $           –   $(1,311,926) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing:

      

Purchases of AFS securities

   –    (108,351)   –    –    (108,351) 

Maturities of AFS securities

   –    86,756    52    –    86,808  

Mortgage loans held for investment, net

   –    31,205    –    –    31,205  

Purchases of property & equipment, net

   –    (58)   (96,005)   –    (96,063) 

Payments made for acquisitions of businesses and intangibles, net

   –    –    (20,662)   –    (20,662) 

Proceeds from sales of businesses, net

   –    –    1,212    –    1,212  

Loans made to franchisees

   –    (68,874)   –    –    (68,874) 

Repayments from franchisees

   –    9,594    –    –    9,594  

Intercompany advances (payments)

   491,619    –    –    (491,619)   –  

Other, net

   –    (21,879)   6,694    –    (15,185) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) investing activities

   491,619    (71,607)   (108,709)   (491,619)   (180,316) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from financing:

      

Repayments of commercial paper

   –    (789,271)   –    –    (789,271) 

Proceeds from commercial paper

   –    1,214,238    –    –    1,214,238  

Repayments of long-term debt

   –    (605,790)   (30,831)   –    (636,621) 

Proceeds from long-term debt

   –    497,185    –    –    497,185  

Customer banking deposits, net

   –    208,443    –    310    208,753  

Dividends paid

   (162,692)   –    –    –    (162,692) 

Repurchase of common stock

   (340,298)   –    –    –    (340,298) 

Proceeds from exercise of stock options, net

   11,529    –    –    –    11,529  

Intercompany advances (payments)

   –    (251,638)   (239,981)   491,619    –  

Other, net

   –    (12,987)   (23,126)   –    (36,113) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   (491,461)   260,180    (293,938)   491,929    (33,290) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effects of exchange rates on cash

   –    –    (417)   –    (417) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net decrease in cash

   –    (220,331)   (1,305,928)   310    (1,525,949) 

Cash – beginning of period

   –    515,147    1,430,030    (843)   1,944,334  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash – end of period

  $–   $294,816   $124,102    $    (533)   $418,385  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

-32-

Table of Contents

Three months ended July 31, 2012 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 Eliminations
 
Consolidated
H&R Block

Net cash used in operating activities: $(20,577) $(42,793) $(309,770) $—
 $(373,140)
Cash flows from investing:          
Purchases of AFS securities —
 (28,990) —
 —
 (28,990)
Maturities and payments received on AFS securities —
 21,112
 17
 —
 21,129
Mortgage loans held for investment, net —
 12,652
 —
 —
 12,652
Purchases of property & equipment —
 (31) (13,242) —
 (13,273)
Loans made to franchisees —
 (5,062) —
 —
 (5,062)
Repayments from franchisees —
 5,154
 —
 —
 5,154
Net intercompany advances 413,392
 —
 —
 (413,392) —
Other, net —
 1,654
 21
 —
 1,675
Net cash provided by (used in) investing activities 413,392
 6,489
 (13,204) (413,392) (6,715)
Cash flows from financing:          
Repayments of other borrowings —
 —
 (30,831) —
 (30,831)
Customer banking deposits, net —
 (179,038) —
 (481) (179,519)
Dividends paid (54,201) —
 —
 —
 (54,201)
Repurchase of common stock (339,088) —
 —
 —
 (339,088)
Proceeds from stock options 468
 —
 —
 —
 468
Net intercompany advances —
 42,908
 (456,300) 413,392
 —
Other, net 6
 146
 (20,091) —
 (19,939)
Net cash used in financing activities (392,815) (135,984) (507,222) 412,911
 (623,110)
Effects of exchange rates on cash —
 —
 (1,498) —
 (1,498)
Net decrease in cash —
 (172,288) (831,694) (481) (1,004,463)
Cash – beginning of the period —
 515,147
 1,430,030
 (843) 1,944,334
Cash – end of the period $—
 $342,859
 $598,336
 $(1,324) $939,871
           


H&R Block Q1 FY2014 Form 10-Q33
Nine months ended
January 31, 2012		  H&R Block, Inc.
(Guarantor)		  Block Financial
(Issuer)		  Other
Subsidiaries		  Eliminations  

Consolidated

H&R Block

 

Net cash provided by (used in) operating activities:

  $8,193   $(448,362)  $(942,602)  $–   $(1,382,771) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing:

      

Purchases of AFS securities

   –    (178,014)   –    –    (178,014) 

Maturities of AFS securities

   –    39,400    1,073    –    40,473  

Mortgage loans held for investment, net

   –    35,460    –    –    35,460  

Purchases of property & equipment, net

   –    (152)   (71,397)   –    (71,549) 

Payments made for acquisitions of businesses and intangibles, net

   –    –    (16,022)   –    (16,022) 

Proceeds from sale of businesses, net

   –    –    533,055    –    533,055  

Loans made to franchisees

   –    (43,649)   –    –    (43,649) 

Repayments from franchisees

   –    8,455    –    –    8,455  

Intercompany advances (payments)

   322,729    –    –    (322,729)   –  

Other, net

   –    7,830    7,491    –    15,321  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) investing activities

   322,729    (130,670)   454,200    (322,729)   323,530  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from financing:

      

Repayments of commercial paper

   –    (413,221)   –    –    (413,221) 

Proceeds from commercial paper

   –    644,168    –    –    644,168  

Customer banking deposits, net

   –    735,491    –    (239)   735,252  

Dividends paid

   (150,058)   –    –    –    (150,058) 

Repurchase of common stock

   (180,566)   –    –    –    (180,566) 

Proceeds from exercise of stock options, net

   (324)   –    –    –    (324) 

Intercompany advances (payments)

   –    61,747    (384,476)   322,729    –  

Other, net

   26    57    (31,507)   –    (31,424) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   (330,922)   1,028,242    (415,983)   322,490    603,827  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effects of exchange rates on cash

   –    –    (3,446)   –    (3,446) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash

   –    449,210    (907,831)   (239)   (458,860) 

Cash – beginning of period

   –    616,238    1,061,656    (50)   1,677,844  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash – end of period

  $–   $1,065,448   $153,825   $(289)  $1,218,984  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

-33-

Table of Contents

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

We are in the process of evaluating alternative means of ceasing to be a savings and loan holding company (SLHC), in which case we would no longer be subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve) as an SLHC. In connection with that evaluation, we are exploring alternatives to continue delivering financial products and services to our customers. Our evaluation of alternatives is in its early stages and therefore we cannot predict the timing, the circumstances, or the likelihood of us ceasing to be regulated as an SLHC.

Following tax law changes made by Congress on January 2, 2013, the Internal Revenue Service (IRS) announced it would delay acceptance and processing of individual tax returns until January 30 to allow sufficient time to complete necessary updates to forms and testing of its processing systems. This represents a nearly two-week delay compared with last tax season when the IRS began processing individual tax returns on January 17, 2012. We believe this delay resulted in an industry-wide delay to tax season filing patterns and, as described more fully below, a significant decline in our third quarter return volumes and revenues. In addition, at January 31 the IRS was continuing to update its systems for certain forms, and completed tax returns that included those forms could not be filed.

RESULTS OF OPERATIONS

Our subsidiaries provide tax preparation and retail banking services. Tax returns are either prepared by H&R Block tax professionals in a(in company-owned or franchise officeoffices or virtually via the internet) or prepared and filed digitally by our clients through H&R Block At Home™Home®, either online or using our software.software or mobile applications. We are the only major company offering a full range of do-it-yourself (softwareDIY - online, software and online)mobile applications - and professional assisted (including traditional in-office) tax preparation solutions to individual tax clients.

RECENT DEVELOPMENTS
CONSOLIDATED On July 11, 2013, HRB Bank and Block Financial entered into a P&A Agreement with Republic Bank. Pursuant to the P&A Agreement, HRB Bank will, among other matters, transfer all of its deposit liabilities, ($759.7 million if the closing were effective July 31, 2013) to Republic Bank with a cash payment of approximately the same amount, subject to several conditions, including the finalization of various operating agreements and regulatory approval. If the respective parties receive regulatory approval on or before September 30, 2013, this transaction will have a closing date of not later than November 15, 2013. If regulatory approval is received after September 30, 2013 but on or before March 31, 2014, this transaction will have a closing date between April 30, 2014 and June 18, 2014. Simultaneously with any closing, HRB Bank will convert into a national banking association, merge with and into Block Financial, surrender its bank charter, and cease to operate as a separate legal entity. At that time, H&R Block, Inc. and Block Financial would no longer be savings and loan holding companies subject to regulatory oversight of the Federal Reserve or related regulatory capital requirements. Prior to entering into this agreement, Republic Bank filed an application with its regulators to convert to a national bank charter which is being processed concurrently with the review of the transaction between H&R Block, Inc. and Republic Bank. We have received indications that additional time is needed for Republic Bank’s regulators to process their applications. We, therefore, expect to continue offering our financial products and services to our clients through HRB Bank for the 2014 tax season.
We plan to continue to offer financial products and services to our clients subsequent to HRB Bank ceasing operations and we are currently negotiating additional agreements with Republic Bank, including an MSA Agreement and a related RPA Agreement, under which Republic Bank will serve as the bank offering H&R Block-branded financial services and products, and we will service and administer such financial services and products for Republic Bank.
The obligations of the parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions including regulatory approval and agreement upon, execution and delivery of the MSA Agreement and the RPA Agreement. We cannot be certain when or if these conditions will be satisfied, and therefore we cannot predict the timing or the likelihood of completing the P&A Transaction and ceasing to be regulated as an SLHC.
RESULTS OF OPERATIONS
OVERVIEW -

A summary of our results of operations is as follows:

Revenues for the quarter were $472.0 million, down 28.8% from the prior year, primarily due to a 28.7% decline in returns prepared by and through H&R Block, resulting from the IRS delay in accepting and processing tax returns until January 30.

Operating expenses for the quarter declined 15.3% from the prior year due to the impact of lower volumes on variable expenses, litigation charges in the prior year, and actions we took at the beginning of this year to reduce workforce and close offices.

We recorded discrete tax benefits of $42.9 million during the quarter of which $43.3 million was due to the settlement of the majority of the issues related to the examination of our 1999 through 2007 U.S. consolidated federal tax returns.

Loss per share from continuing operations for the quarter was $0.06, compared to a loss per share of $0.01 in the prior year.

-34-

Results of our operations are as follows:

                (in 000s) 
   Three months ended January 31,  Nine months ended January 31, 
            2013          2012          2013          2012 

Revenues:

     

Tax Services

  $464,634   $655,701   $684,706   $868,144  

Corporate and eliminations

   7,345    7,579    21,025    24,953  
  

 

 

  

 

 

  

 

 

  

 

 

 
  $471,979   $663,280   $705,731   $893,097  
  

 

 

  

 

 

  

 

 

  

 

 

 

Pretax income (loss):

     

Tax Services

  $(64,189)  $31,716   $(335,203)  $(311,733) 

Corporate and eliminations

   (32,079)   (32,742)   (92,622)   (93,823) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before taxes (benefit)

  $(96,268)  $(1,026)  $(427,825)  $(405,556) 

Income taxes (benefit)

   (79,353)   2,541    (204,061)   (159,821) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss from continuing operations

   (16,915)   (3,567)   (223,764)   (245,735) 

Net income (loss) from discontinued operations

   (793)   218    (6,628)   (74,436) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

  $(17,708)  $(3,349)  $(230,392)  $(320,171) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic and diluted loss per share:

     

Net loss from continuing operations

  $(0.06)  $(0.01)  $(0.82)  $(0.82) 

Net income (loss) from discontinued operations

   (0.01)   –    (0.02)   (0.25) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

  $(0.07)  $(0.01)  $(0.84)  $(1.07) 
  

 

 

  

 

 

  

 

 

  

 

 

 

EBITDA from continuing operations(1)

�� $(52,202)  $45,023   $(295,688)  $(270,077) 

EBITDA from continuing operations – adjusted(1)

   (53,326)   49,233    (299,611)   (231,251) 

▪
Revenues for the current quarter were $127.2 million, up 31.8% from the prior year, primarily as a result of the timing of early-season revenues for our Australian tax operations which we expect will largely reverse by the end (October) of the Australian tax season.
▪
Pretax losses totaled $184.5 million, or 9.0% worse than the prior year, primarily due to accrued costs directly associated with the P&A Transaction and the write-down of mortgage loans held for sale, each as described below. Lower interest expense was offset by foreign currency losses, increased litigation costs/settlements, and increases in other loss reserves.
▪
In connection with the P&A Agreement, we incurred certain fees for professional advisors and accrued employee termination benefits totaling $7.5 million during the three months ended July 31, 2013. In addition, indirectly related to the P&A Transaction, we wrote-down to fair value certain mortgage loans we intend to sell, resulting in a $2.9 million provision during the three months ended July 31, 2013.

34H&R Block Q1 FY2014 Form 10-Q
Table of Contents

Consolidated Results of Operations Data (in 000s, except per share amounts) 
Three months ended July 31, 2013
 2012
REVENUES:    
Tax Services $121,691
 $90,253
Corporate and eliminations 5,504
 6,236
  $127,195
 $96,489
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:    
Tax Services $(144,394) $(140,905)
Corporate and eliminations (40,100) (28,364)
  (184,494) (169,269)
Income tax benefit (71,224) (63,619)
Net loss from continuing operations (113,270) (105,650)
Net loss from discontinued operations (1,917) (1,791)
NET LOSS $(115,187) $(107,441)
     
BASIC AND DILUTED LOSS PER SHARE:    
Continuing operations $(0.42) $(0.38)
Discontinued operations —
 (0.01)
Consolidated $(0.42) $(0.39)
     
EBITDA FROM CONTINUING OPERATIONS (1)
 $(147,174) $(126,641)
EBITDA FROM CONTINUING OPERATIONS - ADJUSTED (1)
 (138,672) (129,214)
     
(1) 

See “Non-GAAP Financial Information” at the end of Item 2this item for a reconciliation of non-GAAP measures.

-35-



H&R Block Q1 FY2014 Form 10-Q35

Table of Contents

TAX SERVICES

This segment primarily consists of our income tax preparation businesses –offerings - assisted, online, and software and includes ourmobile applications, including tax operations primarily in the U.S. and its territories, Canada, and Australia. This segment also includes the activities of H&R BlockHRB Bank (HRB Bank) that primarily support the tax network.

Tax Services – Operating Statistics (U.S. only)      
   Three months ended January 31,   Nine months ended January 31, 
    2013   2012   2013   2012 

Tax returns (in 000s):(1)

        

Company-owned operations

   1,511     2,172     1,695     2,351  

Franchise operations

   1,009     1,454     1,143     1,581  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total retail operations

               2,520                 3,626                 2,838                 3,932  
  

 

 

   

 

 

   

 

 

   

 

 

 

Software

   514     637     538     664  

Online

   954     1,228     1,057     1,330  

Free File Alliance

   61     185     86     208  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total digital tax solutions

   1,529     2,050     1,681     2,202  
  

 

 

   

 

 

   

 

 

   

 

 

 
   4,049     5,676     4,519     6,134  
  

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

 

As of January 31,  2013   2012 

Offices:

    

Company-owned

   5,734     5,787  

Company-owned shared locations(2)

   477     734  
  

 

 

   

 

 

 

Total company-owned offices

               6,211                 6,521  
  

 

 

   

 

 

 

Franchise

   4,384     4,296  

Franchise shared locations(2)

   123     175  
  

 

 

   

 

 

 

Total franchise offices

   4,507     4,471  
  

 

 

   

 

 

 
   10,718     10,992  
  

 

 

   

 

 

 
   

 

 

   

 

 

 

(1)      Fiscal year 2013 returns include approximately 57 thousand and 27 thousand company-owned and franchise returns, respectively, which were completed and ready to file at January 31, 2013, but could not be filed due to the unavailability of certain forms. Revenue related to these returns was deferred at January 31, 2013 and was recognized in the fourth quarter of fiscal year 2013.

           

(2)      Shared locations include offices located within Wal-Mart and other third-party businesses.

         

-36-

Tax Services – Operating Results               (in 000s) 
   Three months ended January 31,   Nine months ended January 31, 
            2013          2012           2013          2012 

Tax preparation fees:

      

U.S.

  $254,225   $410,420    $296,865   $452,730  

International

   20,411    18,136     88,912    83,991  
  

 

 

  

 

 

   

 

 

  

 

 

 
   274,636    428,556     385,777    536,721  

Royalties

   56,211    79,517     71,692    93,149  

Fees from refund anticipation checks

   44,255    43,689     45,807    45,434  

Interest income on Emerald Advance

   29,314    30,062     30,074    30,297  

Fees from Emerald Cards

   11,379    12,193     31,716    31,094  

Fees from Peace of Mind guarantees

   11,950    11,181     57,505    57,254  

Other

   36,889    50,503     62,135    74,195  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total revenues

   464,634    655,701     684,706    868,144  
  

 

 

  

 

 

   

 

 

  

 

 

 

Compensation and benefits:

      

Field wages

   136,532    176,927     214,230    266,725  

Administrative and support wages

   37,039    42,619     105,998    110,222  

Benefits and other compensation

   32,369    41,086     65,908    78,531  
  

 

 

  

 

 

   

 

 

  

 

 

 
   205,940    260,632     386,136    455,478  

Marketing and advertising

   99,262    117,128     118,100    137,037  

Occupancy and equipment

   84,631    93,554     246,749    263,369  

Bad debt

   39,528    48,406     41,148    51,147  

Depreciation and amortization

   24,557    22,425     68,421    69,866  

Supplies

   8,724    10,533     15,155    18,711  

Other

   66,181    71,307     144,200    184,269  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total expenses

   528,823    623,985     1,019,909    1,179,877  
  

 

 

  

 

 

   

 

 

  

 

 

 

Pretax income (loss)

  $(64,189)  $31,716    $(335,203)  $(311,733) 
  

 

 

  

 

 

   

 

 

  

 

 

 

Tax Services – Financial Results (dollars in 000s) 
Three months ended July 31, 2013
 2012
Tax preparation fees:    
U.S. $22,026
 $18,835
International 32,094
 14,058
  54,120
 32,893
Royalties 6,562
 5,851
Fees from Emerald Card 14,611
 12,056
Fees from Peace of Mind® guarantees 27,826
 26,983
Other 18,572
 12,470
Total revenues 121,691
 90,253
     
Compensation and benefits:    
Field wages 39,904
 32,408
Other wages 34,735
 34,367
Benefits and other compensation 15,937
 14,774
  90,576
 81,549
Occupancy and equipment 78,550
 79,851
Marketing and advertising 7,017
 7,452
Depreciation and amortization 22,802
 20,471
Other 67,140
 41,835
Total expenses 266,085
 231,158
Pretax loss $(144,394) $(140,905)
     
Three months ended JanuaryJuly 31, 2013 compared to JanuaryJuly 31, 2012


Tax Services’Services' revenues decreased $191.1increased $31.4 million, or 29.1% from34.8%, compared to the prior year. U.S.International tax preparation fees decreased $156.2increased $18.0 million, or 38.1%128.3%, due primarily to the timing of early-season revenues for our Australian tax operations which we expect will largely reverse by the end (October) of the Australian tax season.
Emerald Card fees increased $2.6 million, or 21.2%, primarily due to a 30.4% decline in tax returns prepared in our company-owned offices, resulting from the IRS delay in accepting and processing tax returns until January 30. Additionally,higher transaction volumes on Emerald Card accounts.
Other revenue totaling $13.2increased $6.1 million was deferred at January 31, as related tax returns could not be filed electronically due to the unavailability of certain forms.

The business of our Tax Services segment is highly seasonal and results for our third quarter represent only a small portion of the tax season. Third quarter results are not indicative of the results we expect for the entire fiscal year. Tax returns prepared in company-owned and franchise offices through February 28, 2013 decreased 7.8% from the prior year. Digital tax returns through February 28, 2013 decreased 1.8% from the prior year. We believe these results are not indicative of results for the entire fiscal year due to the delayed start of the tax season.

Royalties decreased $23.3 million,, or 29.3%, for the quarter due to a 30.6% decrease in tax returns prepared in franchise offices, which resulted primarily from the IRS filing deferral described above.

Fees earned from refund anticipation checks (RACs) were essentially flat to the prior year, as the delay to the start of the tax season negatively impacted the number of returns, but was almost entirely offset by the favorable impact resulting from our decision to not continue a promotion for free RACs offered last year.

Other revenues decreased $13.6 million, or 27.0%48.9%, primarily due to a 25.4% decrease in digital returns, which primarily resulted from the delayed start to the tax season. Additionally, digital revenue totaling $1.2 million was deferred at January 31, as related tax returns could not be filed due to the unavailability of certain forms.

interest income on credit card balances and available-for-sale securities.

Total expenses decreased $95.2increased $34.9 million, or 15.3%15.1%, from the prior year. CompensationTotal compensation and benefits declined $54.7increased $9.0 million primarily due to higher field wages in Australia due to the timing change discussed above. Depreciation and amortization expense increased $2.3 million, or 21.0%11.4%, primarily due to the decline in the number of returns prepared in company-ownedupgrades made to our tax offices. Marketing and advertisingOther expenses declined $17.9increased $25.3 million, or 15.3%, primarily due to a decline in

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early-season advertising. Occupancy and equipment expenses decreased $8.9 million, or 9.5%, primarily due to reductions in rent expense resulting from office closings. Bad debt declined $8.9 million, or 18.3%60.5%, due in part to lower Emerald Advance lineshigher litigation expenses and foreign currency losses of credit (EA)$5.3 million each. We also recorded higher bad debt and RAC volumes and favorable collection rates on EAs, partially offset by incremental expense fromprocessing expenses related to our new credit card offering. Other expenses declined $5.1 million, or 7.2%, primarily due to legal charges recorded in the prior year.

receivables.

The pretax loss for the three months ended January 31, 2013 was $64.2current quarter totaled $144.4 million compared to income of $31.7$140.9 million in the prior year, due primarily to the delayed start to the tax season described above.

Nine months ended January 31, 2013 compared to January 31, 2012year.

Tax Services’ revenues decreased $183.4 million, or 21.1%, from the prior year. U.S. tax preparation fees decreased $155.9 million, or 34.4%, primarily due to a 27.9% decline in tax returns prepared in our company-owned offices. The decline in tax returns prepared in company-owned offices was primarily the result



36H&R Block Q1 FY2014 Form 10-Q
Table of an industry-wide slow start to the tax season. Additionally, we deferred $13.2 million of revenue related to tax returns prepared which we were unable to file electronically due to the unavailability of certain forms.

International tax preparation fees increased $4.9 million, or 5.9%, due primarily to strong tax season results in Australia, partially offset by additional revenue in the prior year resulting from an extension of the Canadian tax season.

Royalties decreased $21.5 million, or 23.0%, for the current year due to a 27.7% decrease in tax returns prepared in franchise offices, which resulted primarily from the delayed start to the tax season described above.

Fees earned from RACs were essentially flat to the prior year, as the delay to the start of the tax season negatively impacted the number of returns, but was almost entirely offset by the favorable impact resulting from our decision to not continue a promotion for free RACs offered last year.

Other revenues decreased $12.1 million, or 16.3%, primarily due to a 23.7% decrease in digital returns, which primarily resulted from the delayed start to the tax season. Additionally, revenue totaling $1.2 million was deferred at January 31, as related tax returns could not be filed due to the unavailability of certain forms.

Total expenses decreased $160.0 million, or 13.6%, from the prior year. Compensation and benefits declined $69.3 million, or 15.2%, primarily due to the decline in returns prepared in company-owned offices and a reduction in force at the end of fiscal year 2012. Marketing and advertising expenses declined $18.9 million, or 13.8%, primarily due to a decline in early-season advertising. Occupancy and equipment expenses decreased $16.6 million, or 6.3%, primarily due to reductions in rent expense resulting from office closings. Bad debt declined $10.0 million, or 19.5% due to lower EA and RAC volumes and favorable collection rates on EAs, partially offset by incremental expense from our new credit card offering. Other expenses declined $40.1 million, or 21.7%, primarily due to legal charges recorded in the prior year.

The pretax loss for the nine months ended January 31, 2013 and 2012 was $335.2 million and $311.7 million, respectively.

Contents


CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS

Corporate operating lossesresults include net interest margin and gains or losses relating to mortgage loans, held for investment, real estate owned and residual interests in securitizations, along with interest expense on borrowings, and other corporate expenses.

Corporate and Eliminations – Operating Results             (in 000s) 
  Three months ended January 31,  Nine months ended January 31, 
           2013          2012          2013          2012 

Interest income on mortgage loans held for investment

 $4,120   $4,948   $12,705   $15,760  

Other

  3,225    2,631    8,320    9,193  
 

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

  7,345    7,579    21,025    24,953  
 

 

 

  

 

 

  

 

 

  

 

 

 

Interest expense

  17,540    21,131    60,111    63,124  

Provision for loan losses

  3,500    4,525    10,250    17,275  

Other

  18,384    14,665    43,286    38,377  
 

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

  39,424    40,321    113,647    118,776  
 

 

 

  

 

 

  

 

 

  

 

 

 

Pretax loss

 $(32,079)  $(32,742)  $(92,622)  $(93,823) 
 

 

 

  

 

 

  

 

 

  

 

 

 

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expenses and eliminations of intercompany activities.

Corporate – Operating Results   (in 000s)
Three months ended July 31, 2013
 2012
Interest income on mortgage loans held for investment $3,542
 $4,417
Other 1,962
 1,819
Total revenues 5,504
 6,236
     
Interest expense 13,424
 20,668
Provision for loan losses 7,603
 4,000
Other, net 24,577
 9,932
Total expense 45,604
 34,600
Pretax loss $(40,100) $(28,364)
     
Three months ended JanuaryJuly 31, 2013 compared to JanuaryJuly 31, 2012

The pretax loss for the three months ended January 31, 2013 totaled $32.1 million, which was essentially flat compared to the prior year.

Pretax results. Interest expense declined $3.6$7.2 million, or 17.0%35.0%, due to lower interest rates on our Senior Notes, coupled withand lower principal balances outstanding. Other expensesOur provision for loan losses increased $3.7$3.6 million, or 90.1%, from the prior year primarily due to a $5.8 million loss we incurred on the early retirement of our $600.0 million Senior Notes.

Nine months ended January 31, 2013 compared to January 31, 2012

The pretax loss for the nine months ended January 31, 2013 totaled $92.6 million, an improvement of $1.2 million, or 1.3%, over the prior year. Interest income on mortgage loans and provisions for loan losses declined $3.1 million and $7.0 million, respectively, as a result of a write-down to fair value of $2.9 million recorded in connection with the continued run-offtransfer of our$7.6 million of mortgage loan portfolio. Interest expense declined $3.0loans from held for investment to held for sale. Other expenses increased $14.6 million, or 4.8%147.5%, primarily due to lower interest rates on our Senior Notes. Other expenses increased $4.9 million fromprofessional fees related to the prior year primarily due to a loss we incurred on the early retirement of our $600.0 million Senior Notes.

pending HRB Bank transaction described above coupled with higher stock-based compensation and insurance costs.

Income Taxes on Continuing OperationsOperations.

Our effective tax rate for continuing operations was 47.7%38.6% and 39.4%37.6% for the ninethree months ended JanuaryJuly 31, 2013 and 2012, respectively. Due to losses in both periods, a discrete tax benefit in either period increases the tax rate while an item of discrete tax expense decreases the tax rate. During the nine months ended January 31, 2013,current quarter, a net discrete tax benefitexpense of $38.7$0.2 million was recorded compared to a net discrete tax benefit of $1.3$2.7 million in the same period of the prior year. This net difference in discrete tax benefitexpense was largely duerelated to differences in income tax reserve adjustments recorded.reserves recorded of $4.4 million offset by a decrease in state interest receivable of $1.9 million. The majority of these income1.0% increase in our tax reserve adjustments were recordedrate over the prior year was due to the change in discrete tax items which was partially offset by a decrease in the third quarter of the current fiscal year due to a settlement with the IRS related to the 1999 through 2007base tax years.

rate.

DISCONTINUED OPERATIONS

Our discontinued

Discontinued operations include our previously reported Business Services segment and our discontinued mortgage operations.

Discontinued Operations – Operating Results              (in 000s) 
   Three months ended January 31,  Nine months ended January 31, 
            2013          2012          2013          2012 

Revenues

  $–   $50,508   $–   $416,436  
  

 

 

  

 

 

  

 

 

  

 

 

 

Pretax income (loss) from operations:

     

RSM and related businesses

  $(511)  $1,117   $(204)  $18,831  

Mortgage

   (765)   (27,385)   (10,639)   (54,019) 
  

 

 

  

 

 

  

 

 

  

 

 

 
   (1,276)   (26,268)   (10,843)   (35,188) 

Income tax benefit

   (483)   (6,462)   (4,215)   (10,268) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss from operations

   (793)   (19,806)   (6,628)   (24,920) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Pretax loss on sales of businesses

   –    (236)   –    (109,485) 

Income tax benefit

   –    (20,260)   –    (59,969) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net gain (loss) on sales of businesses

   –    20,024    –    (49,516) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) from discontinued operations

  $(793)  $218   $(6,628)  $(74,436) 
  

 

 

  

 

 

  

 

 

  

 

 

 
   

 

 

  

 

 

  

 

 

  

 

 

 

Three months ended January 31, 2013Representation and Warranty Claims. SCC records a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. SCC considers the experience gained through discussions with counterparties, and an assessment of, among other things, historical claim results, threatened claims, terms and provisions of related agreements, counterparty willingness to pursue a settlement, legal standing of counterparties to provide a comprehensive settlement, the potential pro-rata realization of the claims as compared to January 31, 2012all similar claims and other relevant facts and circumstances when developing its estimate of probable loss.

The net loss from our discontinued operations totaled $0.8

We received new claims totaling $68.6 million for during the three months ended JanuaryJuly 31, 2013. Net income in2013, the prior year totaled $0.2 million, and included incremental legal accruals recorded at SCC, offset by $20.5 millionmajority of capital loss carry-forwards usedwhich were received from parties with whom we have tolling agreements. We had no payments for losses on the sale of RSM.

Nine months ended January 31, 2013 compared to January 31, 2012

The net loss from our discontinued operations totaled $6.6 million for the nine months ended January 31, 2013. The net loss in the prior year totaled $74.4 million, and included a $99.7 million pretax goodwill impairment related to the sales of RSM McGladrey, Inc. (RSM) and McGladrey Capital Markets LLC (MCM), as well as off-season operating income earned prior to the sale.

-39-

The pretax loss related to the mortgage business included incremental legal accruals and $20.0 million in loss provisions related to SCC’s estimated contingent losses for representation and warranty claims induring the prior year.

Representation and Warranty Claimsthree

months ended July 31, 2013, while loss payments totaled $0.8 million for the three months ended July 31, 2012.

SCC has accrued a liability as of JanuaryJuly 31, 2013 for estimated contingent losses arising from representationsrepresentation and warranties on loans and securities it originated and sold,warranty claims of $118.8$158.8 million which represents SCC’s. The estimate of accrued loss is based on the probablebest information currently available, significant management judgment, and a number of factors, including developments in case law and those factors mentioned above, that are subject to change. Changes in any one of these factors could significantly impact the

H&R Block Q1 FY2014 Form 10-Q37
Table of Contents

estimate. It is reasonably possible that future representation and warranty losses may vary from the amounts recorded for these exposures. SCC currently estimates that the range of reasonably possible loss could be up to $30 million in excess of amounts accrued. This estimated range is based on currently available information, significant judgment and a number of assumptions that are subject to change. The actual loss that may occur. Loss payments totaled $11.2 million and $3.3 million forbe incurred could be more or less than our accrual or the nine months ended January 31, 2013 and 2012, respectively. These amounts were recorded as reductionsestimate of SCC’s accrued representation and warranty liability.

See additional discussion in Item 1, note 13 to the consolidated financial statements.

reasonably possible losses.

FINANCIAL CONDITION

These comments should be read in conjunction with the consolidated balance sheets and condensed consolidated statements of cash flows found on pagesincluded in Part 1, and 3, respectively.

Item 1.

CAPITAL RESOURCES AND LIQUIDITY –- Our sources of capital and liquidity include cash from operations, cash from customer deposits, issuances of common stock and debt. We use capital primarily to fund working capital, pay dividends, repurchase shares of our common stock, acquire businesses and acquire businesses.repay debt. Our operations are highly seasonal and therefore generally require the use of cash to fund operating losses during the period from May through mid-January.

Given the likely availability of a number of liquidity options discussed herein, including borrowing capacity under our unsecured committed line of credit (2012 CLOC),2012 CLOC, we believe that, in the absence of any unexpected developments, our existing sources of capital at JanuaryJuly 31, 2013 are sufficient to meet our operating needs.needs and fulfill our anticipated obligations under the P&A Transaction.
The following table summarizes our statements of cash flows for the three months ended July 31, 2013 and 2012. See discussions in Item 1 note 7 tofor the consolidated financialcomplete statements for details of our 2012 CLOC and in “Regulatory Environment” below for details of pending regulatory changes.

cash flows.

  (in 000s) 
Three months ended July 31, 2013
 2012
Net cash provided by (used in):    
Operating activities $(318,742) $(373,140)
Investing activities (29,090) (6,715)
Financing activities (229,255) (623,110)
Effects of exchange rates on cash (6,621) (1,498)
Net change in cash and cash equivalents $(583,708) $(1,004,463)
     
CASH FROM OPERATING ACTIVITIES –- Cash used in operations totaled $1.3 billion fordecreased $54.4 million from the nine months ended January 31, 2013, compared with $1.4 billion for the sameprior year period last year. This decrease isprimarily due to lower tax payments and operating losses in the current year, partially offset by the paymentrestricted cash requirements of previously accrued legal settlements.HRB Bank.

Restricted Cash. We hold certain cash balances that are restricted as to use. Cash and cash equivalents –- restricted totaled $38.0$55.5 million, $43.1 million and $117.8 million at JanuaryJuly 31, 2013 and 2012 and April 30, 2013, respectively, and primarily consisted of cash held by HRB Bank as required for regulatory compliance, and cash held by our captive insurance subsidiary that will be used to pay claims and cash held by HRB Bank required for regulatory compliance.claims.

CASH FROM INVESTING ACTIVITIES –- Cash used in investing activities totaled $180.3$29.1 million for the current period,three months ended July 31, 2013 compared to cash provided of $323.5$6.7 million in the sameprior year period, last year.primarily due to the following:

Available-for-Sale Securities.During the ninethree months ended JanuaryJuly 31, 2013, HRB Bank purchased $108.4$45.2 million in mortgage-backed securities for regulatory purposes, compared to $178.0$29.0 million in the prior year. Additionally, we received payments as a result of sales or maturingon AFS securities of $86.8$32.1 million during in the nine months ended January 31, 2013current period compared to $40.5$21.1 million in the prior year.

Mortgage Loans Held for Investment.We received net proceeds of $31.2$11.7 million and $35.5$12.7 million on our mortgage loans held for investment forduring the first ninethree months of fiscal yearsended July 31, 2013 and 2012, respectively.

Purchases of Property and Equipment. Total cash paid for property and equipment was $96.1$34.4 million and $71.5$13.3 million for during the ninethree months ended JanuaryJuly 31, 2013 and 2012, respectively. ThisThe increase was primarily a result of upgrades to our tax offices.

Acquisitions of Businesses and Intangibles. Total cash paid for acquisitions was $20.7 million and $16.0 million during the nine months ended January 31, 2013 and 2012, respectively.

Sales of Businesses. We had no significant sales during the nine months ended January 31, 2013. Proceeds from the sales of businesses totaled $533.1 million for the nine months ended January 31, 2012, which included proceeds from the sale of RSM and an ancillary business. We also sold 83 tax offices in fiscal year 2012. The majority of these sales were financed through affiliate loans.

Loans Made to Franchisees. Loans made to franchisees totaled $68.9$6.7 million and $43.6$5.1 million for during the ninethree months ended JanuaryJuly 31, 2013 and 2012, respectively. We received payments from franchisees totaling

-40-

$7.2 million and $5.2 million, respectively. These amounts include both the financing of sales of tax offices and short-term revolving loans made to franchisees to fund off-season operations.


38H&R Block Q1 FY2014 Form 10-Q

Table of Contents

CASH FROM FINANCING ACTIVITIES –- Cash used in financing activities totaled $33.3$229.3 million for the ninethree months ended JanuaryJuly 31, 2013 compared to cash provided of $603.8$623.1 million in the sameprior year period, last year,and primarily duerelates to the lower customer deposit balances and larger share repurchasesfollowing:
Repayments of Long-Term Debt. We had no repayments of long-term debt during the three months ended July 31, 2013. During the three months ended July 31, 2012, we paid amounts totaling $30.8 million due in the current year.connection with a previous acquisition.

Short-TermOther Borrowings. We hadmay use commercial paper borrowings of $425.0 million and $230.9 million at January 31, 2013 andor our 2012 respectively. These borrowings were usedCLOC to fund our off-season losses and cover our seasonal working capital needs.

Proceeds from the Issuance We had no such borrowings outstanding as of Long-Term Debt.July 31, 2013 On October 25, 2012, we issued $500.0 million of 5.50% Senior Notes. The Senior Notes are due November 1, 2022, and are not redeemable by the bondholders prior to maturity.

On November 26, 2012 we redeemed our $600.0 million Senior Notes due in January 2013 at a price of $623.0 million. Proceeds of the $500.0 million Senior Notes and other cash balances were used to repay the $600.0 million Senior Notes.

.

Customer Banking Deposits. CustomerChanges in customer banking deposits increased $208.8resulted in a use of cash of $179.4 million and $179.5 million for the ninethree months ended JanuaryJuly 31, 2013 compared to $735.3 million in the prior year. In the current fiscal year, the delayed start to the tax season shifted many of the deposits we receive on Emerald Cards into February.

and 2012, respectively.

Dividends. We have consistently paid quarterly dividends. Dividends paid totaled $162.7$54.6 million and $150.1$54.2 million for the ninethree months ended JanuaryJuly 31, 2013 and 2012, respectively. The increase from the prior year is dueAlthough we have historically paid dividends and currently plan to an increasecontinue to do so, there can be no assurances that circumstances will not change in the quarterly dividendfuture that could affect our ability or decisions to $0.20 per share compared to $0.15 per share in the prior year, partially offset by a reduction in the number of shares outstanding.pay dividends.

Repurchase and Retirement of Common Stock. We had no repurchase or retirements of our common stock during the three months ended July 31, 2013. During the three months ended July 31, 2012, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0$315.0 million during the nine months ended January. There was $857.5 million remaining under our current share repurchase authorization at July 31, 2013. We also paid cash totaling $22.5 million related2013.
Although we have historically from time to 1.5 million shares that had not yet settledtime repurchased and was accrued as of April 30, 2012. During the nine months ended January 31, 2012, we purchased and immediately retired 13.0 million shares of our common stock at a cost of $177.5 million.

In June 2012,and our Board of Directors extended the authorization to purchase up to $2.0 billionhas approved an extension of our current share repurchase program, there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to repurchase and retire common stock.

Issuances of Common Stock. Proceeds from the issuance of common stock through June 2015. There was $857.5in accordance with our stock-based compensation plans totaled $22.0 million remaining under this authorization at January and $0.5 million during the three months ended July 31, 2013.

2013 and 2012, respectively.

HRB BANK– At January-As of July 31, 2013 and 2012 and April 30, 2013, HRB Bank had cash balances of $291.2$435.5 million compared to $513.5, $341.0 million at April 30, 2012. Distribution and $556.7 million, respectively. Dividends of thatthis cash balance would be subject to regulatory approval and it is therefore not available for general corporate purposes.approval.

Block Financial LLC (Block Financial) has historically made capital contributions

On July 11, 2013, we entered into the P&A Agreement with Republic Bank. Pursuant to the P&A Agreement, HRB Bank will (among other matters) transfer all of its deposit liabilities ($759.7 million if the closing were effective July 31, 2013) to help meet its capital requirements. Block Financial made capital contributionsRepublic Bank with a cash payment of approximately the same amount, subject to HRB Bankseveral conditions, including execution and delivery of $400.0 million during fiscal year 2012. No such contributions were made duringvarious operating agreements and regulatory approval. See additional discussion in Item 1, note 2 to the nine months ended January 31, 2013.

consolidated financial statements.

ASSETS HELD BYFOREIGN SUBSIDIARIES- As of July 31, 2013 – At January 31,and 2012 and April 30, 2013, cash and short-term investmentcash equivalent balances of $38.5$322.6 million, $107.5 million and $273.1 million, respectively, were held by our foreign subsidiaries. As of July 31, 2013 and April 30, 2013, our Canadian operations had approximately $257 million of U.S. dollar denominated borrowings due to various U.S. subsidiaries. These borrowings may be repaid in full or in part at any time. Non-borrowed funds would have to be repatriated to be available to fund domestic operations, and in certain circumstances this would trigger the accrual of additional income taxes would be accrued and paid on those amounts. During the current period, a Canadian subsidiary purchased an intangible asset from a U.S. subsidiary and an Australian subsidiary paid a dividendAs of July 31, 2013, we do not currently intend to its U.S. parent. These transactions effectively brought $72.5 million to the U.S. fromrepatriate any non-borrowed funds held by our foreign subsidiaries.

During previous fiscal years, we used foreign exchange forward contracts to mitigate foreign currency exchange rate risk as we funded our Canadian operations. We do not currently expect to enter into any similar contracts.

BORROWINGS
BORROWINGS

The following charttable provides theratings for debt ratings forissued by Block Financial as of JanuaryJuly 31, 2013:

2013 and 2012 and April 30, 2013:

  Short-term Long-term Outlook

Moody’s

 P-2 Baa2 Negative

S&P

 A-2 BBB Negative

Other than the items discussed in Item 1, notes 7 and 11 to the consolidated financial statements, there

There have been no other material changes in our borrowings from those reported at April 30, 20122013 in our Annual Report on Form 10-K.

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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Other than the items discussed in Item 1, notes 7 and 11 to the consolidated financial statements, there

There have been no other material changes in our contractual obligations and commercial commitments from those reported at April 30, 20122013 in our Annual Report on Form 10-K.

REGULATORY ENVIRONMENT
Regulatory Changes -

The Dodd-Frank Wall Street ReformIn July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and Consumer Protection Act (the Dodd-Frank Act) made extensive changes to the laws regulating banks, holding companies and financial services firms, and requires various federal agencies to adopt a broad range of new implementing rules and regulations and prepare numerous studies and reports for Congress. Among other changes,required by the Dodd-Frank Act imposes consolidated(the Basel III Capital Rules), which establish a new, comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules implement the Basel Committee's December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to depository institutions, compared to the current U.S. risk-based capital rules, and for the first time impose capital requirements on SLHCs. These requirements may have a significant long term effect onsavings and loan holding companies (SLHC). H&R Block, Inc., H&R Block Group, Inc. and Block Financial LLC (our Holding Companies) are SLHCs because they control HRB Bank. The Basel III Capital Rules will become effective for our Holding Companies and HRB Bank on January 1, 2015 (subject to phase-in periods as discussed below), provided that our Holding Companies are still SLHCs on that date.

The Basel III Capital Rules, among other things, introduce a new capital measure called “Common Equity Tier 1” (CET1). The Dodd-Frank Act requires the Federal Reserve to promulgate minimum capital requirements for SLHCs, including leverage (Tier 1) and risk-based capital requirements that are no less stringent than those applicable to banks at the time the Dodd-Frank Act was adopted.

On June 7, 2012, the Federal Reserve issued a notice of proposed rulemakingWhen fully phased in on increased capital requirements, implementing changes required by the Dodd-Frank Act and aspects ofJanuary 1, 2019, the Basel III regulatory capital reforms, portionsCapital Rules will require SLHCs to maintain (i) a minimum ratio of which would applyCET1 to top-tier SLHCs including H&R Block, Inc. Laterrisk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, June 2012, the Officeeffectively resulting in a minimum ratio of the ComptrollerCET1 to risk-weighted assets of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) joined the Federal Reserve in requesting comments on the noticeat least 7% upon full implementation), (ii) a minimum ratio of proposed rulemaking. The proposed rules include new risk-based capital and leverage ratios including (1) minimum common equity Tier 1 risk-basedcapital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio of 4.5%; (2) minimum Tier 1 risk-based capital ratio of 6.0%; (3) minimum total risk-based capital ratio of 8.0%; and (4)as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to adjustedrisk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average consolidated assets (leverage ratio)assets.

Under the Basel III Capital Rules, the initial minimum capital ratios as of 4.0%. January 1, 2015 will be as follows:
▪
4.5% CET1 to risk-weighted assets
▪
6.0% Tier 1 capital to risk-weighted assets
▪
8.0% Total capital to risk-weighted assets
The proposed rules also requireBasel III Capital Rules provide for a number of deductions from and adjustments to CET1. Under current capital standards, the subtractioneffects of goodwill andaccumulated other intangibles from GAAPcomprehensive income items included in capital are excluded for the purposes of calculating Tier 1 capital. The proposeddetermining regulatory capital requirements for SLHCs, if implemented as proposed, would require usratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, certain banking organizations, including our Holding Companies and HRB Bank, may make a one-time permanent election to retain additional capital, restrict our abilitycontinue to (orexclude these items. Implementation of the level at which we would be able to) pay dividendsdeductions and repurchase shares of our common stock and/or alter our strategic plans. As originally proposed, these capital requirements would have been phased in incrementally beginningother adjustments to CET1 will begin on January 1, 2013, with full2015 and will be phased-in over a 4-year period. The implementation to occur by January 1, 2015. However,of the Federal Reserve announced on November 9, 2012 that the implementation would be postponed beyond January 1, 2013 to an unspecified date.

The proposed rules also add a requirement for a minimum capital conservation buffer of 2.5% of risk-weighted assets, which would be incremental to each of the above ratios except for the leverage ratio. If implemented as proposed, the conservation buffer would be phased in, starting at 0.625%will begin on January 1, 2016 increasing byand be phased in over a four-year period.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that amount each year until fully implemented effective January 1, 2019. The capital conservation buffer would resultexpand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.
Except as otherwise disclosed in the following minimum ratios: (1) a common equity Tier 1 risk-based capital ratio of 7.0%; (2) a Tier 1 risk-based capital ratio of 8.5%; and (3) a total risk-based capital ratio of 10.5%. Failure to maintain a conservation buffer would result in restrictions on capital distributions, which includes dividends and share repurchase activity, and certain discretionary cash bonus payments to executive officers.

The deadline for comment on the proposed rules was October 22, 2012, and various banking associations, industry groups, and individual companies provided comments on the proposed rules to the regulators. We filed a comment letter asking the Federal Reserve to follow the Collins Amendment, which includes provisions that defer the effective date for new minimum capital requirements for SLHCs until July 21, 2015, and make the proposed capital requirements for SLHCs effective no earlier than such date. The regulators will now review the comments and publish final rules, which may vary substantially from the proposed rules. As such, the regulations ultimately applicable to our Holding Companies may be substantially different from the proposed regulations. If such regulations are implemented as proposed, banks and their holding companies, including our Holding Companies, will be subject to higher minimum capital requirements and will be required to hold a greater amount of equity than currently required. We will continue to monitor the rulemaking process for any modifications or clarifications that may be made prior to finalization. There is no assurance that the proposed rules will be adopted in their current form, what changes may be made prior to adoption, when the final rules will be effective, or how the final rules would ultimately affect our business. As discussed below in Part II, Item 1A, “RiskRisk Factors,” we are in the process of evaluating alternative meansassessing the impact of these changes on the regulatory capital ratios of the Company and HRB Bank and the capital, operations, liquidity and earnings of the Company and HRB Bank.

P&A Transaction - On July 11, 2013, we entered into the P&A Agreement with Republic Bank. Pursuant to the P&A Agreement, HRB Bank will (among other matters) transfer all of its deposit liabilities ($759.7 million if the closing were effective July 31, 2013) to Republic Bank with a cash payment of approximately the same amount. The obligations of the parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions including regulatory

40H&R Block Q1 FY2014 Form 10-Q
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approval and agreement upon, execution and delivery of the MSA Agreement and the RPA Agreement. We cannot be certain when or if these conditions will be satisfied, and therefore we cannot predict the timing or the likelihood of completing the P&A Transaction and ceasing to be an SLHC, in which case we would no longer be subject to regulation by the Federal Reserveregulated as an SLHC.

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See additional discussion in Item 1, note 2 to the consolidated financial statements.

There have been no other material changes in our regulatory environment from those reported at April 30, 20122013 in our Annual Report on Form 10-K.

NON-GAAP FINANCIAL INFORMATION

Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with accounting principles generally accepted in the United States (GAAP). Because these measures are not measures of financial performance under GAAP and are susceptible to varying calculations, they may not be comparable to similarly titled measures in other companies.

We consider non-GAAP financial measures to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of the our core operating performance.

The following are descriptions of adjustments we make for our non-GAAP financial measures:

▪We exclude from our non-GAAP financial measures litigation charges we incur and favorable reserve adjustments. This does not include legal defense costs.
▪We exclude from our non-GAAP financial measures non-cash charges to adjust the carrying values of goodwill, intangible assets, other long-lived assets and investments to their estimated fair values.
▪We exclude from our non-GAAP financial measures severance and other restructuring charges in connection with the termination of personnel, closure of facilities and related costs.
▪We exclude from our non-GAAP financial measures the gains and losses on business dispositions, including investment banking, legal and accounting fees.
▪We exclude from our non-GAAP financial measures the gains and losses on extinguishment of debt.

We exclude from our non-GAAP financial measures litigation charges we incur and favorable reserve adjustments. This does not include normal legal defense costs.

We exclude from our non-GAAP financial measures non-cash charges to adjust the carrying values of goodwill, intangible assets, other long-lived assets and investments to their estimated fair values.

We exclude from our non-GAAP financial measures severance and other restructuring charges in connection with the termination of personnel, closure of facilities and related costs.

We exclude from our non-GAAP financial measures the gains and losses on business dispositions, including investment banking, legal and accounting fees.

We exclude from our non-GAAP financial measures the effects of discrete income tax reserve and related adjustments recorded in a specific quarter.

We may consider whether other significant items that arise in the future should also be excluded from our non-GAAP financial measures.

We measure the performance of our business using a variety of metrics, including EBITDA, adjusted EBITDA and adjusted pretax income of continuing operations. We also use EBITDA and pretax income of continuing operations as factors in incentive compensation calculations for our employees. Adjusted EBITDA and adjusted pretax income eliminate the impact of items that we do not consider indicative of our core operating performance and, we believe, provide meaningful information to assist in understanding our financial results, analyzing trends in our underlying business, and assessing our prospects for future performance.


H&R Block Q1 FY2014 Form 10-Q41
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The following is a reconciliation of our non-GAAP financial measures:

                (in 000s) 
   Three months ended January 31,  Nine months ended January 31, 
EBITDA and Adjusted EBITDA                  2013              2012              2013              2012 

EBITDA:

     

Net loss from continuing operations – reported

  $(16,915)  $(3,567)  $(223,764)  $(245,735) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Add back:

     

Income taxes

   (79,353)   2,541    (204,061)   (159,821) 

Interest expense

   19,428    23,543    64,895    69,352  

Depreciation and amortization

   24,638    22,506    67,242    66,127  
  

 

 

  

 

 

  

 

 

  

 

 

 
   (35,287)   48,590    (71,924)   (24,342) 
  

 

 

  

 

 

  

 

 

  

 

 

 

EBITDA from continuing operations

   (52,202)   45,023    (295,688)   (270,077) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjustments:

     

Loss contingencies – litigation charges

   (190)   4,171    (4,943)   27,528  

Impairment of goodwill and intangible assets

   –    –    1,421    8,237  

Severance

   (582)   (190)   475    1,920  

Loss (gain) on sales of tax offices

   (352)   229    (876)   1,141  
  

 

 

  

 

 

  

 

 

  

 

 

 
   (1,124)   4,210    (3,923)   38,826  
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA from continuing operations

  $(53,326)  $49,233   $(299,611)  $(231,251) 
  

 

 

  

 

 

  

 

 

  

 

 

 

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                     (in 000s) 
     Three months ended January 31,   Nine months ended January 31, 
Adjusted Pretax Results    2013   2012   2013   2012 

Non-GAAP Pretax Results:

          

Pretax loss from continuing operations – reported

    $(96,268)   $(1,026)   $(427,825)   $(405,556) 
    

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments:

          

Loss contingencies – litigation charges

     (190)    4,171     (4,943)    27,528  

Impairment of goodwill and intangible assets

     –     –     1,421     8,237  

Severance

     (582)    (190)    475     1,920  

Loss (gain) on sales of tax offices

     (352)    229     (876)    1,141  
    

 

 

   

 

 

   

 

 

   

 

 

 
     (1,124)    4,210     (3,923)    38,826  
    

 

 

   

 

 

   

 

 

   

 

 

 

Pretax income (loss) from continuing operations – adjusted

    $(97,392)   $3,184    $(431,748)   $(366,730) 
    

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA from continuing operations and adjusted EBITDA from continuing operations:

  (in 000s) 
Three months ended July 31, 2013
 2012
Net income from continuing operations - reported $(113,270) $(105,650)
Add back:    
Income taxes (71,224) (63,619)
Interest expense 14,446
 22,077
Depreciation and amortization 22,874
 20,551
  (33,904) (20,991)
EBITDA from continuing operations (147,174) (126,641)
Adjustments:    
Loss contingencies - litigation 373
 (2,302)
Severance 1,105
 (501)
Professional fees related to pending HRB Bank transaction 7,024
 —
Loss on sales of tax offices —
 230
  8,502
 (2,573)
Adjusted EBITDA from continuing operations $(138,672) $(129,214)
     
The following is a reconciliation of adjusted pretax income from continuing operations:
  (in 000s) 
Three months ended July 31, 2013
 2012
Pretax income from continuing operations - reported $(184,494) $(169,269)
Adjustments:    
Loss contingencies - litigation 373
 (2,302)
Severance 1,105
 (501)
Professional fees related to pending HRB Bank transaction 7,024
 —
Loss on sales of tax offices —
 230
  8,502
 (2,573)
Pretax income from continuing operations - adjusted $(175,992) $(171,842)
     
FORWARD-LOOKING INFORMATION

This report and other documents filed with the SECSecurities and Exchange Commission (SEC) may contain forward-looking statements within the meaning of the securities laws. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words or variation of words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” “targets,” “would,” “will,” “should,” “could” or“could,” “may” or other similar expressions. Forward-looking statements provide management’smanagement's current expectations or predictions of future conditions, events or results. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. They may include estimates of revenues, income, earnings per share, capital expenditures, dividends, stock repurchase, liquidity, capital structure or other financial items, descriptions of management’smanagement's plans or objectives for future operations, productsservices or services,products, or descriptions of assumptions underlying any of the above. All forward-looking statements speak only as of the date they are made and reflect the Company’sCompany's good faith beliefs, assumptions and expectations, but they are not guarantees of future performance or events. Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data or methods, future events or other changes, except as required by law.

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By their nature, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause such differences include, but are not limited to, a variety of economic, competitive and regulatory factors, many of which are beyond the Company’sCompany's control and which are described in our Annual Report on Form 10-K for the fiscal year ended April 30, 20122013 in the section entitled “Risk Factors,” as well as additional factors we may describe from time to time in other filings with the Securities and Exchange Commission.Commission, including our Current Report on Form 8-K filed July 11, 2013. In addition, with respect to the P&A Transaction, there can be no assurances regarding the ability to obtain all required regulatory and other approvals, the ability of the parties to negotiate and execute the additional required agreements as expected, or the terms and conditions of the additional agreements. It is not possible to predict or identify all such factors and, consequently, no such list should be considered to be a complete set of all potential risks or uncertainties.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During previous fiscal years, we used foreign exchange forward contracts to mitigate foreign currency exchange rate risk as we funded our Canadian operations. We do not currently expect to enter into any similar contracts.

There have been no material changes in our market risks from those reported at April 30, 20122013 in our Annual Report on Form 10-K.

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ITEM 4.CONTROLS AND PROCEDURES

ITEM 4.     CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

– As of the end of the period covered by this Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

– There were no changes during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—II    OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

ITEM 1.     LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, see discussion in Part I, Item 1, note 12 to the consolidated financial statements.

ITEM 1A.    RISK FACTORS
ITEM 1A.
RISK FACTORS

Other than the risk factorsfactor discussed below, there have been no material changes in our risk factors from those reported at April 30, 20122013 in our Annual Report on Form 10-K.

Proposed

Federal Reserve capital requirements may restrict our capital allocation strategies and we are therefore exploring alternatives to cease being aan SLHC. If we were to cease being aan SLHC, the means we use to deliver financial productsservices and servicesproducts to our customers and the revenues and profitability of those offerings could be adversely impacted.

Our subsidiary, HRB Bank, is a federal savings bank chartered under the Home Owner’s Loan Act of 1933, as amended.bank. Our Holding Companies are SLHCs because they control HRB Bank.

The Dodd-Frank Act requires the Federal Reserve to promulgate minimum capital requirements for SLHCs, including leverage and risk-based capital requirements that are no less stringent than those applicable to insured depository institutions at the time the Dodd-Frank Act was enacted. On June 7, 2012,July 2, 2013, the Federal Reserve issued a notice of proposed rulemaking on regulatory capital requirements, implementing changes required by the Dodd-Frank Act and aspects ofapproved the Basel III Capital Rules, which implement a revised definition of regulatory capital, reforms, portionsa new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement. The rule also requires certain levels of which would apply to our Holding Companies (“Proposedequity for the payment of dividends and bonuses, and amends the methodologies for risk-weighting assets. The Revised Capital Rules”). The OCC, which regulates HRBRules will become effective for us as of January 1, 2015. See Part I, Item 2 under "Regulatory Environment" of this Quarterly Report on Form 10-Q and Item 1, “Regulation and Supervision - Bank and Holding Companies” in our Annual Report on Form 10-K as of April 30, 2013 for details of the FDIC joined the Federal Reserve in requesting comments on the Proposed Capital Rules. The comment period expired on October 22, 2012. We provided formal comments on the Proposed Capital Rules. It is currently unclear what the regulatory capital requirements for SLHCs will be and when such capital requirements will become effective. new requirements.
The Federal Reserve announced on November 9, 2012 thatBank, the implementation would be postponed beyond January 1, 2013 to an unspecified date.

In connection with its first examination of the Company, the Federal Reserve Bank of Kansas City, the Company’sCompany's primary banking regulator, has requested that the Company include in its policies theissued guidance set forth in Supervisory Letter SR 09-4 (March 27, 2009) regarding the payment of dividends, stock redemptions and stock repurchases by bank holding companies. InPursuant to Supervisory Letter SR 11-11 (July 21, 2011), the Federal Reserve described the supervisory approach it would use to examine SLHCs andhas directed


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examiners to apply the principles of SR 09-4 to SLHCs.

This guidance Pursuant to SR 09-4, we have committed to provide notice to the Federal Reserve prior to paying dividends or repurchasing shares.

The Revised Capital Rules would require our Holding Companies to retain significant additional capital, even though HRB Bank has regulatory capital substantially above the “well capitalized” level. At this time, we do not foresee regulatory flexibility in this regard in light of the Federal Reserve’sReserve's views of the statutory requirements

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imposed under the Dodd-Frank Act. Accordingly, while our current belief is that dividends at current levels would continue to be permitted as long as HRB Bank remains well capitalized, the Federal Reserve will closely supervise and likely restrict our other capital allocation decisions, including stock repurchases, acquisitions, and other forms of strategic investment. We believe

On July 11, 2013, we entered into the P&A Agreement with Republic Bank. Simultaneously with any closing, HRB Bank will convert into a national banking association, merge with and into Block Financial, surrender its bank charter, and cease to operate as a separate legal entity. At that such regulatory constraints are inconsistent with our strategic plans, operational needs,time, HRB and growth objectives.

We are in the process of evaluating alternative means of ceasing to be an SLHC, in which case weBlock Financial would no longer be savings and loan holding companies subject to regulation byregulatory oversight of the Federal Reserve as an SLHC. In connection with that evaluation, we are exploring alternativesor related regulatory capital requirements. See additional discussion in Part I, Item 1, note 2 to the consolidated financial statements.

We plan to continue deliveringto offer financial products and services to our customers.

Our evaluationclients subsequent to HRB Bank ceasing operations and we are currently negotiating additional agreements with Republic Bank, including an MSA Agreement and a related RPA Agreement, under which Republic Bank will serve as the bank offering H&R Block-branded financial services and products, and we will service and administer such financial services and products for Republic Bank.

The obligations of alternatives is in its early stagesthe parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions including regulatory approval and agreement upon, execution and delivery of the MSA Agreement and the RPA Agreement. The P&A Transaction will not be consummated unless the parties can agree on the terms and conditions of the MSA Agreement and RPA Agreement, and we can provide no assurances when or if the parties will be able to do so. Additionally, we cannot be certain when or if these conditions will be satisfied, and therefore we cannot predict the timing the circumstances, or the likelihood of uscompleting the P&A Transaction and ceasing to be regulated as an SLHC, or whether cessation of SLHC status would have a material adverse effect on our business and our consolidated financial position, results of operations and cash flows.

We face substantial litigation in connection with our various business activities, and such litigation may damage our reputation, impair our product offerings or result in material liabilities and losses.

We, and/or our subsidiaries, have been named and from time to time will likely continue to be named, as a defendant in various legal actions, including arbitrations, class actions, actions or inquiries by state attorneys general, and other litigation arising in connection with our various business activities. Adverse outcomes related to litigation could result in substantial damages and could cause our earnings to decline. Negative public opinion could also result from our subsidiaries’ actual or alleged conduct in such claims, possibly damaging our reputation, which, in turn, could adversely affect our business prospects and cause the market price of our stock to decline.

In addition, a state appellate court issued a ruling, which is subject to a pending request for additional appellate review, that a competitor’s deferral of tax preparation fees in connection with its refund transfer product was an extension of credit requiring truth in lending disclosures. We believe there are factual and legal differences that distinguish us and our RAC product and, as such, that we are not bound by the court’s decision. However, any requirement that materially alters our offering of RACs could have a material adverse impact on our business, results of operations and financial condition.

We rely on a single vendor or a limited number of vendors to provide certain key products or services, and the inability of these key vendors to meet our needs could have a material adverse effect on our business, results of operations and financial condition.

Historically we have contracted, and in the future will continue to contract, with a single vendor or a limited number of vendors to provide support for our tax, financial and other products and services. As with any vendor we utilize, we are vulnerable to vendor error, service inefficiencies, service interruptions or service delays; however, our sensitivity to any of these issues is heightened (1) due to the seasonality of our business, and (2) with respect to any vendor that we utilize for the provision of any such product or service that has specialized expertise, is a sole provider, or whose indemnification obligations are limited. If such a vendor is unable to meet our needs in a timely manner or if the products or services provided by such a vendor are terminated or otherwise delayed because the vendor fails to perform adequately, is no longer in business, experiences shortages, or discontinues a certain product or service that we utilize, or if we are not able to develop alternative sources for these products and services quickly and cost-effectively, it could result in a material and adverse impact on our business, results of operations and financial condition.

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SLHC.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

A summary of our purchases of H&R Block common stock during the thirdfirst quarter of fiscal year 20132014 is as follows:

              (in 000s, except per share amounts) 
    Total
Number of Shares
Purchased(1)		   Average
Price Paid
per Share		   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs(2)		   Maximum $ Value
of Shares that May
Be Purchased Under
the  Plans or Programs		 

November 1 – November 30

   1    $18.05     –    $857,504  

December 1 – December 31

   19    $18.59     –    $857,504  

January 1 – January 31

   –    $–     –    $857,504  
                     
(in 000s, except per share amounts) 
  
Total Number of
Shares Purchased (1)

 
Average
Price Paid
per Share

 
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs(2)

 
Maximum Dollar Value of
Shares that May be Purchased
Under the Plans or Programs (2)

May 1 – May 31 3
 $27.93
 —
 $857,504
June 1 – June 30 147
 $27.80
 —
 $857,504
July 1 – July 31 1
 $28.14
 —
 $857,504
(1) 

Total

We purchased approximately 151 thousand shares of 20 thousand were purchased in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on nonvested shares.

restricted shares and restricted share units.
(2) 

In June 2012,2008, our Board of Directors extended theapproved an authorization to purchase up to $2.0 billion of our common stock through June 2012. In June 2012, our Board of Directors extended this authorization through June 2015.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.    OTHER INFORMATION

(a) The following information is provided in accordance with Item 1.01

None.

44H&R Block Q1 FY2014 Form 10-Q
Table of Form 8-K (Entry into a Material Definitive Agreement):

Indemnification Agreement Additional Indemnitees.As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2012, file number 1-6089, filed on March 7, 2012 (the “March 2012 Form 10-Q”), the Board of Directors of the Company approved a form of indemnification agreement (the “Indemnification Agreement”) to be entered into by the Company and certain of its directors and officers (each, an “Indemnitee”). On March 6, 2013, pursuant to approval by the Board of Directors of the Company, the Company entered into an Indemnification Agreement with the following additional Indemnitees:

Gregory J. Macfarlane, Chief Financial Officer

Contents

Delos “Kip” Knight, President, International

The description of the Indemnification Agreement as set forth in the March 2012 Form 10-Q, and the form of Indemnification Agreement filed as Exhibit 10.2 to the March 2012 Form 10-Q, are incorporated herein by reference.

(b) The following information is provided in accordance with Item 5.02(e) of Form 8-K (Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers):

Amendment to 2013 Long Term Incentive Plan.Effective March 6, 2013, we amended and restated our 2013 Long Term Incentive Plan (the “LTI Plan”) to amend Sections 4.2 and 13.5 to permit our Compensation Committee to delegate its authority under the LTI Plan (including the authority to sub-delegate) to (i) except with respect to officers who are designated as executive officers by the Company’s Board of Directors under Section 16 of the Securities Act of 1934, determine whether a violation of a restrictive covenant under the LTI Plan occurred, and (ii) if a violation occurred, to demand payment of value already realized under an award and/or cancel or suspend the award in the event of such a violation. A copy of the LTI Plan, as amended and restated, is attached as Exhibit 10.1 hereto and incorporated herein by reference.

Forms of Award Agreement.On March 6, 2013, the Company’s Board of Directors adopted new forms of award agreement, based on the recommendation of its Compensation Committee, for long term incentive awards of restricted share units and non-qualified stock options pursuant to the LTI Plan. The award agreements include, among other provisions, termination, change in control, restrictive covenants, and clawback provisions. Copies of the forms of award agreement for restricted share units and non-qualified stock options are filed as Exhibits 10.2 and 10.3, respectively, herewith.

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ITEM 6.     EXHIBITS

The following exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:

31.1    Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 10.1 *2013 Long Term Incentive Plan, as amended and restated on March 6, 2013.
 10.2 *Form of 2013 Long Term Incentive Plan Award Agreement for Restricted Share Units, as approved on March 6, 2013.
 10.3 *Form of 2013 Long Term Incentive Plan Award Agreement for Non-Qualified Stock Options, as approved on March 6, 2013.
 10.4 *H&R Block Severance Plan, as amended and restated on January 1, 2013.
 10.5 *Letter Agreement between the Company, H&R Block Management, LLC and William C. Cobb, effective January 3, 2013.
 31.132.1Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 32.2
32.2Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 101.INS
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Extension Calculation Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE    XBRL Taxonomy Extension Presentation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase


 101.SCHXBRL Taxonomy Extension Schema
 101.CALH&R Block Q1 FY2014 Form 10-QXBRL Extension Calculation Linkbase
 101.LABXBRL Taxonomy Extension Label Linkbase
 101.PREXBRL Taxonomy Extension Presentation Linkbase
 101.REF

XBRL Taxonomy Extension Reference Linkbase45

*Indicates management contracts, compensatory plans or arrangements.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

H&R BLOCK, INC.

LOGO

/s/ William C. Cobb
William C. Cobb
President and Chief Executive Officer
March 7,September 5, 2013

LOGO

/s/ Gregory J. Macfarlane
Gregory J. Macfarlane
Chief Financial Officer
March 7,September 5, 2013
LOGO/s/ Jeffrey T. Brown
Jeffrey T. Brown
Chief Accounting and Risk Officer
March 7,September 5, 2013

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46H&R Block Q1 FY2014 Form 10-Q